401k/Roth401k and IRA/Roth IRA Combination

[blashmet]

What are the possible combinations of 401k/Roth401k and IRA/Roth IRA's a person can have? Can one open all four in order to increase their contribution limit? Is it ideal to open all four and max them out?

[humandraydel]

You can have all 4 but it will not increase your contribution limit. In other words, the total IRA contribution is $5500 per year, so if you contribute $3k to a traditional IRA, you can only contribute $2500 to a Roth. Same thing with a 401k - if you contribute $10k to a Roth 401k, you can only contribute $7500 to a traditional 401k.

[blashmet]

You can have all 4 but it will not increase your contribution limit. In other words, the total IRA contribution is $5500 per year, so if you contribute $3k to a traditional IRA, you can only contribute $2500 to a Roth. Same thing with a 401k - if you contribute $10k to a Roth 401k, you can only contribute $7500 to a traditional 401k.

Ah, I see. So if one was looking to maximize the amount they could contribute to tax-advantaged accounts with the least number of accounts open, it would be a combination of a IRA(or roth)/401k(or roth)? In other words, the contribution limit is:

401k + Roth 401k = one contribution limit

IRA + Roth IRA = second contribution limit

Is that correct?

[disneysteve]

In other words, the contribution limit is:

401k + Roth 401k = one contribution limit

IRA + Roth IRA = second contribution limit

Is that correct?

Yes.

You can contribute up to $5,500/year to IRAs and up to $17,500/year to 401ks.

[SeanH]

Just an aside - I'm under the impression there's a pretty good case for contributing to (and maxing out) a ROTH IRA before a ROTH 401K. The withdrawal rules are more favorable.

EDIT: and yes, I am aware they are in two different contribution limit piles.

[disneysteve]

Just an aside - I'm under the impression there's a pretty good case for contributing to (and maxing out) a ROTH IRA before a ROTH 401K. The withdrawal rules are more favorable.

I agree. IRAs give you infinite investment options and better withdrawal rules so the first $5,500/year should fund the Roth and then contribute to the 401k.

[blashmet]

I agree. IRAs give you infinite investment options and better withdrawal rules so the first $5,500/year should fund the Roth and then contribute to the 401k.

So do you think it should be:

1. Max out Roth IRA ($5,500)
2. Max out Roth 401k ($17,500)


or would you factor in a regular IRA/401k somewhere and split up the contributions?

I'm in a low income tax bracket now and expect my salary to gradually increase up until I retire, so what do you think would be the best for me?

[blashmet]

Just an aside - I'm under the impression there's a pretty good case for contributing to (and maxing out) a ROTH IRA before a ROTH 401K. The withdrawal rules are more favorable.

EDIT: and yes, I am aware they are in two different contribution limit piles.

So in your opinion, for someone who is in a low income tax bracket and expects their salary to gradually increase until retirement, what do you think the split should be?

1. Max out Roth IRA ($5,500)
2. Max out Roth 401k ($17,500)

Or would it be smart to do a split like this?

1. Roth IRA ($2,250)
2. IRA ($2,250)
3. Roth 401k ($8,750)
3. 401k ($8,750)

[Petunia 100]

Don't neglect traditional 401k/IRA completely. Remember, everyone gets to have some taxable income taxed at 0% via standard deduction and personal exemption. If all of your withdrawals were from Roth, that means you paid too much tax along the way.

Personally, I would do this:

1. Contribute to traditional 401k enough to get all the match.
2. Contribute max to Roth IRA.
3. If you have more money to invest, contribute more to traditional 401k.

[MonkeyMama]

I'd do all ROTH. Presumably you will have many higher income years (and/or tax increases) later to do regular IRA and 401ks.

That said, it depends what tax bracket you are in. 15% is a ROTH no-brainer. At 25% tax rate, I feel kind of 50-50 about it.

[blashmet]

Don't neglect traditional 401k/IRA completely. Remember, everyone gets to have some taxable income taxed at 0% via standard deduction and personal exemption. If all of your withdrawals were from Roth, that means you paid too much tax along the way.

Personally, I would do this:

1. Contribute to traditional 401k enough to get all the match.
2. Contribute max to Roth IRA.
3. If you have more money to invest, contribute more to traditional 401k.

I have no math on my 401k through work, so it seems like I would:

1. Max out Roth IRA.
2. Contribute the rest of my investable income to the traditional 401k.

But this leaves me with the following questions:

1. Why max out the Roth IRA and not split the $5,500 between an IRA and Roth IRA?
2. Why invest the rest of my investable income into the traditional 401k and not split the $17,500 between a 401k and roth 401k?

Thanks for your help.

[blashmet]

I'd do all ROTH. Presumably you will have many higher income years (and/or tax increases) later to do regular IRA and 401ks.

That said, it depends what tax bracket you are in. 15% is a ROTH no-brainer. At 25% tax rate, I feel kind of 50-50 about it.

So you'd do:

1.$17,500 into a Roth 401k
2. $5,500 into a Roth IRA
3. None into 401k or IRA

Can you get a Roth 401k through Vanguard/Fidelity or does it have to be an employer? Do you know if they give you a break on some of the fees if you open a ROth401k and Roth IRA?

[MonkeyMama]

So you'd do:

1.$17,500 into a Roth 401k
2. $5,500 into a Roth IRA
3. None into 401k or IRA

Can you get a Roth 401k through Vanguard/Fidelity or does it have to be an employer? Do you know if they give you a break on some of the fees if you open a ROth401k and Roth IRA?

No - I would do the IRA first, for reasons that others mentioned.

1. $ 5,500 ROTH IRA
2. $17,500 ROTH 401k

A 401k has to be through an employer. There is no break on fees if you have both accounts (none that I know of).

[humandraydel]

No - I would do the IRA first, for reasons that others mentioned.

What rules are more favorable for a Roth IRA vs Roth 401k - that you can withdraw contributions at any time? Long term, most people will change employers and be able to roll over into a Roth IRA.

Also, don't forget that a company match will ALWAYS be in a traditional 401k, so most people will always have some mix (which is good).

[humandraydel]

But this leaves me with the following questions:

1. Why max out the Roth IRA and not split the $5,500 between an IRA and Roth IRA?
2. Why invest the rest of my investable income into the traditional 401k and not split the $17,500 between a 401k and roth 401k?

Thanks for your help.

At the end of the day, you should have both accounts with some breakdown - something between 30/70 and 70/30 Roth/Traditional is ideal. It doesn't really matter whether the IRA is Roth or Traditional or the 401k is Roth or Traditional.

If you are maxing an IRA and 401k, my recommendation would be (assuming you are in the 15% bracket):

1. Max Roth IRA ($5500)
2. $10k to Roth 401k
3. $7500 to Traditional 401k

This gives you a 67% Roth / 33% Traditional split.


EDIT: In the interest of full disclosure, I just realized I'm not following my own advice - I max 2 Roth IRAs and 1 traditional 401k which gives me a 33/67 Roth/Traditional.

One more thing to consider - theoretically maxing a Roth 401k is a "larger" amount than maxing a Traditional 401k due to the fact that $17500 post-tax equates to ~$23k of pre-tax income.