By Jenn Pavlick
Updated on November 15, 2023
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Whether you’re just starting to plan for your retirement or looking to optimize your existing plan, understanding the contribution limits for both Roth 401(k) and Roth IRA retirement accounts is an integral part of the process.
Choosing the right Roth option allows you to maximize your savings, achieve financial comfort, and make the most of qualified distributions when you finally reach retirement age.
In this blog post, we’ll dig deeper into the differences between Roth 401(k) and Roth IRA contribution limits, guiding you on how to pick the right path for your retirement savings.
A Roth 401(k) is an excellent retirement savings tool for many investors. This employer-sponsored retirement account allows employees to make after-tax contributions toward their retirement savings.
Here’s the catch with a Roth 401(k): unlike a traditional 401(k), where you pay taxes when you make withdrawals, you pay taxes upfront with a Roth 401(k) — allowing you to make qualified withdrawals entirely tax-free in retirement.
There’s a balance of pros and cons when contributing to a Roth 401(k), making it crucial to weigh your options carefully. Tax-free withdrawals constitute a significant upside, but one downside is that since you pay taxes on your contributions before they enter your plan, you won’t be able to deduct your Roth contributions on your income tax return.
In 2024, the employee contribution limit to Roth 401(k)s is $23,000. If you’re 50 or older, you can make catch-up contributions of an additional $7,500. Including your employer’s contribution, the total contribution limit is $69,000 (plus the catch-up, if applicable).
The IRS outlines limits each year to account for cost-of-living adjustments, and any fluctuations in these limits can impact your overall retirement planning strategy.
A Roth IRA (Individual Retirement Account) is a retirement savings vehicle that is not employer-sponsored and, instead, you open individually at a provider of your choice. Like a Roth 401(k), it allows after-tax contributions, with the sweet deal of tax-free qualified withdrawals and no required minimum distributions (RMDs).
Roth IRAs tend to offer more flexibility than pre-tax traditional IRAs and 401(k)s, including the ability to take penalty-free early withdrawals of your contributions at any time. However, they do come with their share of limitations, such as IRS-designated income limits and lower contribution limits than 401(k)s, which can restrict high earners from reaping the benefits.
The Roth IRA contribution limit for 2024 is $7,000, with a $1,000 catch-up contribution for those aged 50 or older. Also, income phase-out ranges come into play, limiting or eliminating direct contributions for higher-income earners. You also won’t benefit from any employee matching with this type of Roth account since your employer isn’t involved.
Understanding the contribution limits for both Roth 401(k) and Roth IRA accounts is vital, as these limits dictate how much you can channel toward your retirement savings each year. These limits are influenced by various factors, such as your age, the type of account you choose, and your income level.
Here are the after-tax Roth contribution limits for 2024:
While both account types accept after-tax contributions, a Roth 401(k) has a higher limit for each account holder and will also allow you to benefit from employer contributions. Many high earners don’t use Roth accounts, as they don’t meet income requirements for Roth IRAs and find greater value in making pre-tax contributions to tax-deferred accounts like traditional 401(k)s.
The contribution limits for Roth and traditional 401(k)s are the same. This parallel presents an interesting option for maximizing tax-advantaged savings: contributing to both a Roth and traditional 401(k) or IRA.
Diversifying your contributions across accounts with different tax treatments gives you additional flexibility over your tax bracket in retirement. This strategy could potentially enable you to benefit from lower tax rates in retirement while simultaneously claiming tax deductions of some amount in the present.
Roth IRA income limits play an instrumental role in deciding who is eligible to contribute to a Roth IRA. If your income exceeds a certain amount, you might not be eligible to contribute to a Roth IRA. These limits differ based on your tax filing status (whether you’re single, married filing jointly, and so forth).
Roth IRA contribution income limits are adjusted annually to keep up with inflation.
Below you’ll find the upper limit of the phase-out range for direct Roth IRA contributions based on your tax filing status and Modified Adjusted Gross Income (MAGI):
Those with higher incomes can still contribute to a Roth 401(k) account.
If you’re considering a job change, you might contemplate rolling over your current Roth 401(k) into a new or existing Roth IRA account. You can easily roll one Roth account into another since they are both after-tax. If you’re changing jobs and your new job also offers a Roth 401(k), there’s a good chance you can roll your old plan into your new employer plan.
Even if your new employer does offer a Roth 401(k), you may consider rolling your old Roth account into a Roth IRA to access broader investment options and potentially lower fees. A direct rollover can be made tax-free and penalty-free. Speak to a financial advisor for specific guidance and determine what is best for your savings strategy.
As of 2024, the Roth IRA contribution limit is $7,000. However, if you’re 50 or older, you can contribute up to $8,000. The IRS changes these limits year to year. Your brokerage can inform you of the current annual contribution limits each calendar year.
For 2024, the employee contribution limit for a Roth 401(k) is $23,000. However, if you’re 50 or older, you can contribute up to $7,500 more in catch-up contributions.
Absolutely! You can contribute to both a 401(k) and an IRA, allowing you to maximize your retirement savings and benefit from different tax treatments. This is a smart move to make in your financial planning and helps taxpayers supplement their Social Security income in retirement.
A Roth IRA offers tax-free qualified withdrawals, a high degree of flexibility with regard to penalty-free early withdrawals, and does away with RMDs. A Roth 401(k), with its higher contribution limits and potential for employer matching, is also a robust retirement savings option.
Choosing the most suitable retirement account is a decision that demands careful consideration and expert advice. Speak to a financial advisor for tailored guidance for your personal finance goals.
If you want to take control of past retirement accounts and execute a rollover, consider working with Capitalize. We can help manage the entire process to set you up on the next step in your financial planning process.
Ready to get started on your journey toward a worry-free retirement? Learn more today.
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