“A Roth IRA with a 401(k) makes a lot of sense.” – Charles Hamowy
IRAs, 401(k)s, Roth IRAs and Roth 401(k)s are similar in many ways. There are also some important differences in these types of accounts, especially when it comes to family income.
Families above a set income limit are not allowed to contribute to a Roth IRA and the income limits change each year. This rule is generally well known but erroneously thought to mean that anyone above the income limit can’t contribute to a Roth account. The point lost in translation is that these income limits don’t apply to Roth 401(k)s. That means if you make too much money to contribute to a Roth IRA, you can still contribute the full amount to a Roth 401(k). Conversely, if you are below the income level you can contribute the full amount to both a Roth IRA and a Roth 401(k), if it makes sense for you and your family.
Additionally, anyone can convert money from a regular IRA to a Roth IRA regardless of income. That means if you make too much to contribute to a Roth IRA, you can still convert money from a traditional, or regular, IRA into a Roth IRA. You don’t have to convert your entire IRA money into Roth – you have the option to convert just a portion of it. You will have to pay the income taxes on any amount you convert so be sure to include this in your planning. Additionally, there are important rules that need to be followed if you have any after-tax money in your IRAs, so be sure to consult with a professional about this ahead of time. By the way, you can also convert from a Traditional 401(k) to a Roth IRA or a Roth 401(k).
Roth IRAs and Roth 401(k)s offer an interesting tax strategy for many families and should not be automatically dismissed as an option by families who “make too much money for a Roth.” Remember, the income limits don’t apply to Roth 401(k)s or converting money from a regular IRA to a Roth IRA. You should consult a legal or tax professional regarding your individual situation.