Can You Have Both a Roth IRA and a 401k?

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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Roth IRA and 401k accounts are retirement accounts designed to reduce financial stress in your later years. Each dollar you invest can only go toward one investment. You can’t take the $1 you put into a Roth IRA and simultaneously put it into a 401k plan. Which one of them makes the most sense to you? We’ll discuss the pros and cons of each retirement plan and how to manage both of them. 

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What Is a Roth IRA and How Does It Work?

A Roth IRA lets you make after-tax contributions to your retirement portfolio. Although you get taxed right away, you don’t pay taxes on qualified Roth IRA withdrawals when you get older. If you have had the account for at least five years and start withdrawing at 59 and a half years old, your gains are tax-free. This tax-free advantage attracts many investors, especially younger professionals. For example, if you invest $100,000 over 20 years, and that money turns into $250,000, you won’t get taxed on the $150,000 capital gain. You can save thousands of dollars in the long run with this approach.

The Roth IRA has contribution limits based on your age. These are the annual limits currently in place:

  • $6,000 maximum contribution for investors under 50 years old
  • $7,000 maximum contribution for investors who are 50 years or older

The Roth IRA program also has income limits. If you make too much money more than the limit, you can’t contribute to your Roth IRA. The limits depend on your income level and filing status:

  • Single, head of household, or married filing separately: $129,000/yr
  • Married filing jointly: $204,000/yr

These income limits are based on your adjusted gross income. IRA contributions, student loan interest payments, and other obligations reduce your adjusted gross income. Itemized tax deductions do not affect your adjusted gross income. These deductions only impact your taxable income.

Roth IRAs have more favorable withdrawal rules than 401k plans. IRA contributors can withdraw their cost basis at any time before retirement without incurring any penalties. If you invest $10,000 and turn it into $12,000, you can withdraw up to $10,000 without penalties. Every dollar over $10,000 comes with withdrawal fees since you’re tapping into your capital gains. Early 401k withdrawals get a 10% penalty, with some exceptions. This penalty comes on top of the deferred taxes you avoided earlier. Roth IRAs help if you want to withdraw funds before turning 59 and a half years old, but 401k accounts have several benefits.

What Is a 401k and How Does It Work?

A 401k is a tax-deferred account. You won’t pay tax on any of your contributions today, but you will owe taxes when you withdraw money from your account. 401k contributions reduce your current tax burden and help you invest more money in the present. If you make $100,000 and invest $10,000 into a 401k plan, your taxable income becomes $90,000. A lower taxable income leads to lower taxes. Using pretax income on a 401k can also put you in a lower tax bracket.

You will have to pay capital gains after cashing out on your 401k contributions. If you turn $100,000 into $250,000 over 20 years, you will get taxed on the $150,000 capital gain. You can pay less in taxes by spreading out your withdrawals instead of taking everything out at once, but you will get hit with capital gains taxes. You will also have to pay taxes on the initial contribution since you avoided those taxes earlier. A 401k doesn’t let you escape taxes forever, explaining why people call it a tax-deferred account. The distributions get taxed as ordinary income. You can withdraw funds when your income is lower to minimize tax payments. 

401k plans have more generous limits than their Roth IRA counterparts. You can invest up to $20,500 per year into a 401k plan. Anyone 50 years or older can invest up to $27,000 per year into a 401k plan. The IRS changes these limits each year.

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Can You Contribute to Both a Roth IRA and a 401(k)?

You can contribute to both accounts as long as your income fits within the Roth IRA’s parameters. The 401k has no income limit, meaning you could make millions of dollars and still have one of these accounts open. 

Benefits of Having Both a 401(k) and a Roth IRA

Having multiple retirement accounts helps you diversify your holdings and tax burden. While the 401k defers tax payments, a Roth IRA’s contributions get taxed now in exchange for tax-free withdrawals in the future.

Your 401k plan has a higher limit, helping you invest more funds and reduce your taxes. A lower tax payment gives you more flexibility for Roth IRA contributions. Not everyone is alone with the 401k retirement plan since some employers match their workers’ 401k plan contributions. It’s a tax write-off for them and practically a source of free money for you.

How to Make a 401k and Roth IRA Work Together

You can maximize your returns with 401k and Roth IRA accounts. A 401k account lowers your taxes and lets you invest more of your money. This tax-deferred account reduces your taxes, making it easier to afford Roth IRA contributions. The 401k plan is a helpful solution once you max out at your Roth IRA contribution limit. 

401k contributions can also help you qualify for a Roth IRA. The IRS uses adjusted gross income to determine IRA limits. While itemized tax deductions won’t help, 401k contributions lower your adjusted gross income. If you are single and make $140,000 per year, you normally wouldn’t qualify for Roth IRA contributions. Depending on your age, your maximum 401k contribution is either $20,500 or $27,000. The lower 401k contribution limit reduces your adjusted gross income to $119,500. 

If you prefer a Roth IRA, you should still consider a 401k account. Roth IRAs have far lower limits than 401k retirement plans. Limiting yourself to Roth IRA contributions represents a missed opportunity to grow your portfolio further while lowering your tax burden. The Roth IRA provides tax protection in the future, while the 401k plan balances it out with tax protections in the present. Both accounts can grow your wealth and lead to a promising retirement.

Can You Invest Cryptocurrencies in a Roth IRA and 401(k)?

Roth IRA and 401k accounts let investors plan for the long-term. You can invest in stocks, mutual funds, and other assets. Some investors want to diversify beyond equities, and cryptocurrencies have gained steady attention. Bitcoin was worth $1 in February 2011, and it reached over $67,000 a decade later. Other crypto assets such as Dogecoin and Shiba Inu have also produced attractive returns. 

Some people view crypto as a trade, but others want to hold onto it long-term. Stashing your crypto in a Roth IRA makes the gains tax-free, a significant advantage for assets that can grow exponentially. Traditional financial institutions have been reluctant to embrace crypto, but iTrustCapital provides Roth IRAs that accept crypto. iTrustCapital is a self-directed crypto IRA account provider. You can open up or transfer traditional, Roth or SEP IRA accounts to invest in cryptocurrencies. You can diversify your IRA crypto holdings with precious metals. iTrustCapital gives you these perks for a 1% transaction fee. You won’t owe any additional costs or fees.

Crypto is in its early innings, and capital gains can spell trouble for your taxes. Protect your crypto’s appreciation by putting it in an iTrustCapital Roth IRA account. You can navigate the iTrustCapital website to learn more about their Crypto IRA account or open an account.

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