Roth IRAs and 401(k) plans offer different retirement-savings benefits: Roth IRAs offer after-tax savings, while 401(k)s offer pretax savings. Knowing the limitations on a husband and wife to contribute to a 401(k) plan and a Roth IRA allows you to maximize your retirement-savings benefits in the way that makes the most sense for your financial situation.
Being married does not prohibit you from contributing to either a 401(k) plan or a Roth IRA. If both spouses work for a company offering a 401(k) plan, both spouses can contribute. For Roth IRAs, the couple's modified adjusted gross income must fall below the annual limits; otherwise they are ineligible to contribute. Unlike a traditional IRA, having access to a 401(k) plan in no way affects your Roth IRA contributions. In addition, the contribution limits for contributing to a retirement plan are counted separately for each spouse.
Each retirement account, whether it be a Roth IRA or a 401(k) plan, must be linked to one person only; a husband and wife cannot have both their names on a 401(k) plan or Roth IRA. While an eligible individual can start a Roth IRA for himself, he cannot simply open a 401(k) plan for himself. For example, if the wife works at a company offering a 401(k) plan, the husband would not be entitled to make a 401(k) plan contribution unless his company also offered a 401(k) plan. A spouse may, and often does, list the spouse as the sole beneficiary of the account so that should something happen to one spouse, the other spouse will inherit the account.
Roth IRAs permit a working spouse to make a contribution to the nonworking spouse's Roth IRA if the nonworking spouse does not have enough compensation to make a contribution for herself. To qualify, the spouses must file a joint income tax return. If you file separately, you cannot make a contribution to the spouse's Roth IRA. A 401(k) plan does not allow the same spousal contribution, even if the spouse with insufficient compensation has a 401(k) plan.
Two major factors affect how much you contribute to each plan when you cannot make the maximum contribution to both plan types: your income tax rates and your employer's matching contribution. Your employer may match your contribution to your 401(k) plan, but not your Roth IRA. For example, your employer may offer to match up to $7,000 in contributions. Therefore, each of the first $7,000 of money you defer to your 401(k) plan essentially counts double because of the employer match. In addition, consider whether you anticipate paying a higher tax rate in retirement or a lower tax rate. If you expect a higher tax rate later, you are better off paying the taxes on it now so that you can take tax-free distributions, so consider maxing your Roth IRA first. If you expect a lower tax rate later, consider maxing the 401(k) plan first so that you can claim the tax break in the current year when it is worth more to you.
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