Laura answers a listener's question about using multiple Roth accounts and the annual contribution limits that apply.
Laura answers a listener's question about using multiple Roth accounts and the annual contribution limits that apply.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from Sarah M., who says:
"I've been listening to your podcast for a few years and enjoy the increased weekly frequency! My employer started a 401(k) with traditional and Roth options this year. Since I'm over 50, can I contribute $30,500 to my Roth at work and $8,000 to my Roth IRA for a total of $38,500 for 2024? Would my contribution limit change if my employer also contributes to my 401(k) above the $30,500 I put in?"
Those are excellent questions, Sarah! And I really appreciate you being a long-time listener. I love that you want to put as much as possible in Roth accounts. I'll explain what a Roth is, how many Roth accounts you can have, and the maximum amounts you and your employer can contribute to them annually.
Welcome back, everyone, and thanks for joining me. I'm Laura Adams, an award-winning author, finance spokesperson, money speaker, founder of The Money Stack newsletter, and host of the Money Girl podcast with 43 million downloads.
If you're interested in being your own boss or want to take your small business to the next level, check out my latest title, Money-Smart Solopreneur–A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers. It's available as a paperback, ebook, or audiobook wherever books are sold!
To learn more about my other books, debt, and credit online money courses, or how to work with me, visit my website, LauraDAdams.com.
What's the difference between traditional and Roth?
Let's start with the fundamental difference between traditional and Roth retirement accounts. Traditional accounts, such as a 401(k) or IRA, allow you to make tax-deductible contributions. That reduces your taxable income for the year, which typically lowers your taxes.
However, your withdrawals of traditional contributions and earnings are taxed as ordinary income. Plus, you must pay a 10% early withdrawal penalty if you tap a traditional retirement account before age 59.5 unless you qualify for a penalty exemption.
Roth accounts, such as a Roth 401(k) or IRA, require you to contribute on an after-tax basis, with no tax benefit in the current year. Your original Roth contributions can be withdrawn anytime with no taxes or penalties.
However, if you're younger than 59.5, withdrawals of Roth earnings would be subject to income taxes and a 10% penalty unless you qualify for a penalty exemption. But once you have owned a Roth for five years and are over 59.5, you can withdraw your account earnings entirely tax-free.
The benefits of a Roth retirement account are a big deal because you could have decades of growth that never gets taxed! That's different from a traditional account, where taxes on investment growth are deferred until a future date.
RELATED: How to use a mega backdoor Roth conversion
Should I choose a traditional or Roth account?
Whether you should choose a traditional or Roth retirement account depends on whether you prefer a tax deduction on contributions. Using a Roth makes sense if you believe your income or tax rate will be higher in the future. In other words, paying Roth taxes upfront at a lower rate is better than paying taxes later at a potentially higher rate.
Even if your income in retirement won't be higher, you might strongly believe tax rates for all Americans will rise in the future. Or, you don't want the hassle of paying income taxes to the federal and state governments (depending on where you live) on your future retirement income. All those situations or beliefs are reasons to favor loading up one or more Roth accounts.
But if you believe your future retirement income or tax rate will be lower, deferring taxes with traditional contributions may be best. And if you're unsure, you can split contributions between traditional and Roth accounts.
RELATED: Your complete guide to 401(k) retirement accounts
Who qualifies for a Roth IRA (Individual Retirement Account)?
Unlike a traditional IRA, you can only contribute to a Roth IRA when you earn less than an annual threshold. The limit depends on your tax filing status and modified adjusted gross income (MAGI). Here are the 2024 income limits to qualify for a Roth IRA:
If you have a Roth IRA but become ineligible in the future, you can keep your account indefinitely and enjoy its tax-free growth. However, you can only make new contributions in years when your income is below the annual allowable limit.
Note that there are no income limits for a workplace Roth, like a Roth 401(k) or 403(b).
So, if Sarah is within the Roth IRA income limit for her tax filing status, she can max one out. As she mentioned, the 2024 contribution limit for a traditional or Roth IRA is $7,000 or $8,000 if you're over 50.
READ ALSO: How to use a spousal IRA to boost your retirement
How many Roth accounts can you have?
When you qualify for a Roth IRA, you can also max out a traditional or Roth workplace retirement plan in the same year. If you're under 50, your maximum contributions would be $23,000 to your workplace Roth and $7,000 to your Roth IRA, for a total of $30,000.
If you're like Sarah and are over 50, your maximum contribution would be, as she mentioned, $30,500 to a Roth at work plus $8,000 to a Roth IRA, for a total of $38,500.
If you earn too much for Roth IRA contributions, you can contribute to a traditional IRA instead. However, depending on your (or your spouse's) income, traditional IRA contributions may not be deductible when you or a spouse also participate in a retirement plan at work.
RELATED: 6 rules for contributing to an IRA and a 401(k) in the same year
What's the contribution limit on workplace retirement plans?
In addition to high contribution limits, workplace retirement plans typically have another terrific advantage: matching funds. Often, employers incentivize workers to participate in their retirement plans by matching their contributions up to a limit.
For instance, your company might match 50% of your contributions up to 6% of your salary. Or they could match 100% of your contributions up to 3% of your salary. That's free money that you should always be sure to max out!
Note that matching funds typically get deposited into a traditional account on your behalf. So, even if you contribute to an after-tax Roth 401(k) or 403(b), any matching funds from your employer will go into a pre-tax account, so you don't have to pay tax on them.
Another excellent benefit of workplace retirement plans is that employer matching doesn't count against your annual contribution limit. For 2024, the total contributions from you and your employer can be up to 100% of your salary or $69,000 (or $76,500 if you're over 50).
For example, if Sarah earns $100,000, she could contribute up to $30,500, and her employer could contribute up to $46,000 for a total of $76,500. If you're under 50, you could max out a workplace plan with $23,000, and your employer could add up to an additional $46,000, for a total of $69,000.
The additional funds from an employer could be in the form of matching, based on your contributions, or profit-sharing, based on company performance. The high contribution limits and lack of income limits make a Roth workplace retirement plan an excellent option to invest for retirement. First, prioritize maximizing your Roth at work, then consider contributing to a Roth IRA if you qualify.
READ ALSO: Am I investing too much for retirement?
This is episode 842 which means there's so much more Money Girl for you to explore in previous episodes! Make sure you're following me on Instagram and the Money Girl Facebook page!
If you have a question you'd like me to cover, please leave it on our voicemail line at 302-364-0308. You can also send an email using my contact page at LauraDAdams.com.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! It's audio-engineered by Steve Riekeberg. Our Director of Podcasts is Brannan Goetschius, our digital operations specialist is Holly Hutchings, our advertising operations specialist is Morgan Christianson, and our marketing and publicity associate is Davina Tomlin.