401K and Roth
I just want to make sure….My son has the maximum withdrawals taken for his 401k each year, and, also, he puts the maximum allowed in a Roth IRA each year. These 2 retirement plans are mutually exclusive, are they not?
Thank you in advance.
Permalink Submitted by Bruce Steiner on Sun, 2009-08-16 23:55
Yes. He can effectively put in even more if his 401(k) plan has a Roth feature, whereby he can designate his contributions as Roth contributions. It’s very much like a Roth IRA.
Permalink Submitted by Alan Spross on Sun, 2009-08-16 23:58
Basically, yes. The only affect one has on the other is that 401k deferrals reduce Box 1 W2 income. If that income was otherwise too high, he might not be eligible to make regular Roth contributions. These two types of plans do not have any negative interactions.
A long term positive relationship may also exist. A maximum 401k contributor shows that he has a good savings mentality and is more likely than most to enter retirement with substantial tax deferred savings subject to RMDs. These RMDs will inflate his tax bracket in retirement and his Roth will be more valuable because Roth distributions will not be taxable and will not further inflate his tax bracket. Conversely, heavy spenders that fail to accumulate retirement savings will tend to have a low tax bracket in retirement and for them, a deductible IRA contribution (if eligible) may well make more sense.
If the 401k has a Roth option, the above mix can further be managed toward a desirable outcome.