When it comes to planning for retirement, one of the most common questions high earners have is whether they can max out both their 401k and Roth IRA every year. With the rising cost of living and the uncertainty of Social Security, it's no surprise that individuals want to ensure they have enough saved for their golden years. And while the short answer to this question is yes, there are some important factors to consider.
The Basics: 401k and Roth IRA
Before diving into whether high earners can max out both accounts, it's important to understand the difference between a 401k and a Roth IRA. A 401k is an employer-sponsored retirement plan where employees can contribute a portion of their income, typically pre-tax, to be invested in a variety of options. The contributions are then taxed upon withdrawal during retirement.
On the other hand, a Roth IRA is an individual retirement account that allows individuals to contribute after-tax dollars to be invested in a variety of options. The contributions and earnings are then tax-free upon withdrawal during retirement, as long as certain requirements are met.
The Contribution Limits
For 2021, the maximum contribution limit for a 401k is $19,500, with an additional catch-up contribution of $6,500 for individuals over 50. This means that high earners can contribute a total of $26,000 to their 401k account each year. For a Roth IRA, the maximum contribution limit is $6,000, with an additional catch-up contribution of $1,000 for individuals over 50. This brings the total maximum contribution to $7,000 for high earners.
So, to answer the initial question, yes, high earners can technically max out both their 401k and Roth IRA every year. However, there are some important factors to consider when making this decision.
Income Limits for Roth IRA Contributions
While there is no income limit for contributing to a 401k, there are income limits for contributing to a Roth IRA. For single individuals, the income limit for contributing to a Roth IRA in 2021 is $140,000, and for married couples filing jointly, it's $208,000. If your income exceeds these limits, you may not be eligible to contribute to a Roth IRA.
However, there is a backdoor Roth IRA conversion option for high earners who may not be eligible to contribute directly to a Roth IRA. This involves contributing to a traditional IRA and then converting it into a Roth IRA. This can be a complex process and requires working with a tax advisor to ensure it's done correctly.
Marriage and Contribution Limits
Another important factor to consider is the impact of marriage on contribution limits. If you are a high earner and your spouse also has a high income, this may affect your ability to contribute to a Roth IRA. As mentioned above, the income limits for married couples filing jointly are higher than for single individuals. However, if you are married and file separately, your income limit drops to $10,000, making you ineligible to contribute to a Roth IRA.
It's important to talk to a tax advisor to determine the best course of action for your specific situation if you are getting married and want to contribute to a Roth IRA.
Other Retirement Savings Options
While maxing out both a 401k and Roth IRA may seem like the ideal scenario, it's also important to consider other retirement savings options. For high earners, there are additional options such as a traditional IRA or a health savings account (HSA) that can provide tax benefits and help diversify your retirement savings portfolio.
It's crucial to work with a financial advisor or tax advisor to determine the best retirement savings strategy for your individual needs and goals.
High earners can certainly max out both their 401k and Roth IRA every year, but it's important to consider factors such as income limits, marriage, and other retirement savings options. It's also crucial to seek the advice of a tax advisor to ensure you are making the most of your retirement savings and minimizing your tax burden. With careful planning and guidance, you can set yourself up for a comfortable and secure retirement.