With so many retirement tools available and tax laws to govern each, figuring out what you can and cannot contribute to your investments can be confusing. To add to the confusion, 401(k) retirement plans may have additional restrictions and rules participants must follow. Making contributions to both a Roth IRA and a 401(k) is possible as long as you follow the tax laws in effect for the tax year.
Making Roth IRA Contributions
Taxpayers can make contributions to a Roth IRA as long as they have taxable compensation to report, which includes salaries, wages, tips, bonuses, professional fees, commissions, taxable alimony and self-employment income. Additionally, the person making the contribution must meet income requirements set by the IRS. Modified adjusted gross income (AGI) requirements and filing status requirements are defined this way: AGI of $177,000 or less for married people filing jointly, a widow or widower; AGI of $120,000 or less for a single person, head of household or a married person filing separately who did not live with the spouse during the year; AGI of $10,000 or less for a person who is married and filing separately but also living with the spouse during the tax year. Modifications to adjustable gross income include deductions, exclusions and the subtraction of Roth conversions and Roth rollovers that were taken during the year. IRS publication 590 outlines in detail the requirements for a Roth IRA contribution.
Amount of Roth Contributions
Contribution amounts vary slightly depending upon the age of the filer. In most cases, contributions cannot exceed $5,000 for a tax year. Filers who are 50 years of age or older cannot contribute more than $6,000 for a tax year. However, as of 2011, filers falling into certain modified adjusted gross income levels may have the amount they can contribute reduced. For example, if you are a qualifying widower or a person married and filing jointly and your modified adjusted gross income falls between $177,000 and $167,000, your contribution limit may be less than the $5,000 or $6,000 others in your filing status category are allowed. This reduction may change in subsequent tax years. Reduction details are explained in IRS publication 590.
The IRS restricts the total amount contributed to a safe-harbor 401(k) to $16,500 as of 2011. Contributions made to a SIMPLE 401(k) plan are limited to $11,500. A 401(k) plan may have other contribution requirements or restrictions that must be followed by participants. The plan administrator will have details on a particular plan's contribution restrictions.
Taxpayers can take advantage of contribution limits set for both types of retirement accounts — Roth IRA and 401(k). In cases where a 401(k) plan includes a Roth 401(k), the taxpayer can take advantage of both types of Roth accounts. For example, the taxpayer can contribute the full contribution amount of $16,500 to the 401(k) and the contribution amount of $5,000 to the regular Roth IRA. The taxpayer can place the $16,500 contribution limit anywhere inside the investments available in the 401(k) which could include the Roth 401(k).
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