This is a question that may cross the mind of anyone that is planning to optimize their full saving potential. Fortunately, having one option will not be a consideration that is required or a limiting factor if you wish to apply for the other.
The key factor when applying for a 401(k) and also a Roth IRA is the eligibility. Another major consideration is the maximum and minimum amounts that you can contribute. Let’s dive deeper into these factors.
Roth IRA qualification and contributions
A Roth IRA account is a retirement account in which you make contributions with your after-tax income. Note that you make this contribution privately, so it will not be funds contributed by your employer. This means opening a Roth IRA account will be a personal affair between you and your bank or financial institution and your contribution to this type of account will not be taxed.
As far as the qualifications are concerned, all you need is a taxable income and a spouse. As for the contributions, there are various factors that limit the amount you can contribute. The maximum contribution per individual is $6,000 if you are under 50 years old but it goes up slightly to $7,000 if you are over 70. Also, you are eligible for this contribution if you earn less than $124,000 individually or if your joint annual income with your spouse is less than $196,000.
You cannot have a Roth IRA account if you earn more than $124,000 if you file individually or if your joint contribution with your spouse is over $206,000 as per 2020 guidelines.
401(k) qualifications and contributions
401(k) plans are set up by employers and so it is a prerequisite to have a job first. You also need to have worked for at least 1 year and the age requirement for qualification is at least above 21 years old. The amount you wish to contribute to your 401(k) will be automatically deducted from your salary by your employer before your income is taxed.
The beauty of having a 401(k) is that you can contribute regardless of your income level, unlike in a Roth IRA where incomes above a certain level disqualify you. The contribution limits are also higher with the maximum amount you can contribute in 2020 at $19,500 in pre-tax contributions. Individuals over 50 are allowed to contribute as much as $26,000 thanks to the allowed catch-up contribution amount of $6,500.
Summary
If you meet the qualifications for both, then by all means you can go ahead and open a Roth IRA and run it concurrently with your 401(k).
