Can I Contribute to a Roth 401k and a Traditional 401k in the Same Year?

Many individuals find themselves in a position where they are eligible to contribute to both a Roth 401k and a traditional 401k in the same year. This decision can sometimes be confusing due to the differences in how these accounts are taxed, but it is indeed possible to contribute to both. Let's explore the details and limitations involved.

Understanding the Tax Benefits

When it comes to contributing to a Roth 401k and a traditional 401k, the key takeaway is the differences in tax treatment during contribution and withdrawal phases:

Roth 401k: Contributions are made with after-tax dollars. No taxes are due at withdrawal provided certain requirements are met. Traditional 401k: Contributions are made with pretax dollars. Taxes (federal and state) are due when funds are withdrawn in retirement.

Contribution Limits and Eligibility

Fortunately, you can contribute to both a Roth 401k and a traditional 401k in the same year, but with certain limitations:

Total IRA Contribution Limit:

For the tax year 2018, you are limited to a total contribution of $5,500 in all IRA accounts combined, including traditional and Roth IRA, plus an additional $1,000 if you are over the age of 50. This means if you contribute $5,500 to a traditional IRA and $5,500 to a Roth IRA, you are exceeding the limit.

Deductible Traditional IRA Contribution:

The deductibility of traditional IRA contributions is influenced by your income and whether you (or your spouse) are also contributing to a 401k plan. The limits are as follows:

Single filers: Fully deductible contributions up to $6,500 if over 50 and MAGI is less than $63,000. Partial deductibility above $63,000 but below $73,000. No deductibility above $73,000. Married filing jointly: Fully deductible contributions up to $6,500 if over 50 and MAGI is less than $101,000. Partial deductibility above $101,000 but below $123,000. No deductibility above $123,000.

You can still make non-deductible contributions to a traditional IRA at any income level, but the IRA contribution limits for non-deductible and Roth IRAs are also income-based.

Roth IRA Contribution Limits

Roth IRA contributions are also influenced by your Modified Adjusted Gross Income (MAGI):

Single filers: Fully deductible contributions up to $6,500 if over 50 and MAGI is less than $129,000. Partial contributions above $129,000 but below $144,000. No contributions above $144,000. Married filing jointly: Fully deductible contributions up to $6,500 if over 50 and MAGI is less than $191,000. Partial contributions above $191,000 but below $202,500. No contributions above $202,500.

Impact on 401k Contributions

While IRA contributions (whether Roth or traditional) do not directly impact your ability to contribute to a 401k, they can indirectly affect your eligibility for certain IRS tax benefits. There are no specific limits for contributing to a 401k in the same year as an IRA. The 401k contribution limit for 2018 is $18,500, plus $6,000 for individuals over the age of 50. These contributions are made with pretax dollars, as long as you are under the limit.

However, the modified adjusted gross income (MAGI) limits mentioned for IRA contributions can influence your ability to deduct traditional IRA contributions. It is important to note that even if you exceed the IRA contribution limits, you can still make non-deductible contributions at any income level.

Conclusion

Yes, you can contribute to both a Roth 401k and a traditional 401k in the same year. The key is understanding the tax implications and contribution limits for each account. Make sure to stay within the IRS limits to avoid penalties and ensure your contributions are maximized and aligned with your financial goals.