Roth 401(k)s are becoming increasingly popular, and as a family financial planner, I hear more questions from clients regarding contributing to both Roth 401(k)s and Roth IRAs. 

The two questions I hear most are: 

“Does a Roth 401(k) have required minimum distributions?” 

and,

“I have a little extra to save; even if I max out my Roth 401(k), can I contribute to a Roth IRA? – can I contribute to both a Roth 401(k) and Roth IRA?”

Let’s discuss these inquiries,

If you’re retired, and you have a Roth 401(k)-unlike a Roth IRA-you will have to begin required minimum distributions (RMDs) at the age of 72 (for those born on or after July 1, 1949). You will want to switch from your Roth 401(k) to a Roth IRA before that magical age if you do not want to spend as much as the government requires each year. 

When you have money in a Roth IRA, instead of being required to withdraw a certain amount each year from your retirement savings, you can choose how much, when, or if ever you want to let it be a tax-free portion of a future inheritance. There are, however, several things to keep in mind if you want to make the most of Roth IRA accounts. 

A Closer Look at the 5-Year Rule

You can withdraw your contributions and earnings if you’re over 59.5. Contributions to a Roth IRA or Roth 401(k) are not tax-deductible, but once you reach the age of 59.5, you can withdraw them tax and penalty-free. Withdrawals from 401(k)s may be subject to additional restrictions, which can significantly impact your tax liability in retirement. Remember that either type of Roth account must be open for at least five years to get this total tax-free benefit. You start the clock ticking on January 1, the year of your first contribution.

It seems pretty straightforward, but some people may not be aware that when a Roth 401(k) is rolled over to a Roth IRA, the clock is reset; timing matters regarding Roth IRAs.

Imagine that you’ve contributed to your Roth 401(k) for ten years and your Roth IRA for five years. Rolling over your Roth 401(k) into your Roth IRA is no problem. It has been at least five years. Suppose, however, you only have your Roth IRA for two years. Even though your Roth 401(k) meets the 5-year rule, if you roll it into your two-year-old Roth IRA, you’d need to wait another three years before you could withdraw earnings tax-free (although you can remove contributions tax-free at any time).

It might be a good idea to start a Roth IRA at least five years before you retire if you want to roll over your Roth 401(k). Simply opening the account is not enough – you need to contribute too, and not everyone is eligible to contribute. A Roth IRA conversion also starts the 5-year window.

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How to Open and Contribute to a Roth IRA

Even if you contribute the maximum to a 401(k), you still may be able to contribute to a Roth IRA. A maximum contribution to both is the ideal scenario for retirement savings. Ideally, you should contribute as much as possible to both, if you can.

A person over 50 can contribute up to $20,500 to a 401(k) in 2022, with a catch-up of $6,500. The maximum contribution to a Roth IRA is $6,000, plus a $1,000 catch-up contribution if 50 or older. This is a significant amount of money. See my blogs on Mega Backdoor Roth IRAs for strategies to get even more into the tax-free bucket.

From the outside, it appears that you’re okay. However, Roth IRAs have yearly income limits, which could make your plan somewhat problematic. Roth 401(k)s do not have income limits, but Roth IRAs do. If your adjusted gross income (AGI) is $144,000 or over ($214,000 or above for married filers filing jointly) for 2022, you will not be able to contribute to a Roth IRA. 

Can I Contribute to Both a 401K and IRA? – Additional Considerations

It sounds like you are contributing the maximum amount to your Roth 401(k). I love the doors this could potentially open for you down the road to do some serious planning.

If you plan on retiring before 65, we also need to consider health insurance. Having some assets that do not impact your Modified Gross Income can significantly affect what you pay for early retiree health insurance premiums.

Lastly, a tax deduction might lower your AGI, making you eligible for a Roth IRA, or even make you qualified to realize some long-term capital gains at the 0% rate. 

If you’d like to learn more about retirement saving strategies, let’s set up a call – you can book a call with me by clicking the link below!

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This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss specific tax issues with a qualified tax advisor.