Can I contribute to a Roth IRA if I have a Roth 401(k)?

June 30, 2021

Q. I’m almost 28, single, and an engineer. I save the max in my 401(k) at work. My taxable income was less than $90,000. Growing up, my parents started a Roth IRA for me. I have been contributing several thousand dollars a year to that Roth since high school. I now have the option at work to convert my 401(k) to a Roth. If I do so, because my income will continue to rise and I want tax-free withdrawals, will I be able to contribute to my non-employer Roth account?

— Saver

A. Yours is a great question.

There’s a lot of confusion when it comes to determining eligibility for IRA contributions.

Contributions to a Roth IRA are limited by your income, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York and an adjunct professor of personal finance at Montclair State University.

For 2021, you can contribute the maximum amount of $6,000 into a Roth IRA if your modified adjusted gross income (MAGI) is less than $125,000. Qualified individuals over 50 can contribute $7,000. If your income is between $125,000 and $140,000 you can contribute a lesser amount, he said.

“Contributions to a Roth IRA do not save you taxes in the year they are made, but once the money is inside a Roth IRA, you or your beneficiaries do not have to pay taxes on the growth or the subsequent withdrawal,” he said. “This contrasts with a traditional IRA or a 401(k) where contributions are tax deductible in the year it is made, and funds grow tax deferred but are taxed when you withdraw money from the account.”

When deciding whether to contribute to a Roth account or a 401(k) or a traditional IRA, you must compare your current tax rate to your expected tax rate when you withdraw the money from the 401(k) or IRA, typically at retirement, Panambur said.

In general, if your tax rate is expected to be higher in retirement when you withdraw the money, you should contribute to a Roth IRA, he said. Therefore, usually it is a good idea to contribute to a Roth when you are young and have a low tax rate, he said.

“Opening a Roth IRA and making contributions to it is a good idea for children if they have earned income,” he said. “For the same reason, converting a deductible retirement account to a Roth account may be beneficial at times when your income and tax rates are relatively low such as during retirement.”

If you withdraw money from a 401(k) plan for a Roth conversion, the withdrawal will be included in your adjusted gross income and affect your taxes and several other factors, he said. However, the conversion amount is not included in your MAGI for testing eligibility to a Roth IRA.

“If you do decide on a Roth conversion, then you may also benefit from making nondeductible contributions to your retirement account,” he said. “You will have to evaluate the benefit of a Roth conversion or a nondeductible contribution by considering all the factors.”

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Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.