Roth IRA vs/and/or 401k Contributions
I am trying to help my two 26 year old daughters and here is my question(s).
Q1. They both currently have Roth IRA and have made their $5000 max 2011 contributions. The total value of these accounts is just over $30,000 and they have been contributing for multiple years. They have been contributing since their first part time or summer jobs. If they made ~$2,000 during summer jobs I typically “gifted” them that amount and they slammed the whole thing in their Roth IRAs. Nice Dad, huh?
They are now have real private sector jobs and their employer (same company different city) offer a 401k. I found it odd but their contribution percentages range from 1% to 75% of their income with a max at $16,500/yr. They can easily afford to contribute to the max but I was wondering if their is some restriction on funding both a ROTH IRA and a 401k at the same time in the same year?
Q2. Why can you contribute so much more to a 401k, $16,500/yr in their case and only $5,000/yr in a ROTH IRA.
I much perfer the retirement money in a “self directed Roth IRA” with say TDAmeritrade where I can use the full spretrum of investments vehicles to manage their accounts to the lousy 11 options in their 401k.
Q3. Can you refer me to a good site that explains Roth IRA or/or 401k or at least explaing the INCOME LIMITS which I undertand their are on the Roth IRA but not the company 401k?
Permalink Submitted by Richard Rea on Sun, 2011-05-08 23:19
A1. Do ‘research’ and think I found the answer to Q1.
Contributions may be made to a Roth IRA even if the owner participates in a qualified retirement plan such as a 401(k). (Contributions may be made to a traditional IRA in this circumstance, but they may not be tax deductible.)
Permalink Submitted by Alan Spross on Mon, 2011-05-09 00:08
Q 1) Yes, your researched answer is correct. However, there is still an upper modified AGI limit for making regular Roth IRA contributions. But even if they exceed that limit and cannot make regular Roth IRA contributions, if they do NOT have traditional IRA accounts, they can make a regular TIRA contribution and then convert it to a Roth IRA which puts them in the same position as if they had been able to make a regular Roth contribution. If they DO have other TIRA accounts, they can still make the contribution, but the conversion will be mostly taxable under the pro rate rules.
Q 2) Congress wrote the laws that way. For many workers, DC plans had to offer higher limits because they have been used to replace defined benefit pensions in many segments of the economy. These plans also allowed companies to transfer most of the risk of offering plans to the employees at a cost of only limited matching contributions.IRA contributions fall under Sec 219 and 408 of the tax code while qualified plans fall under Sec 401. IRA contributions originated from ERISA in 1973 while 401k plans originated a few years later. Both accounts have had several inflation adjustments and catch up contribution increases over the years. There are probably additional more complex reasons as well for the difference.
Q 3) See link for the Roth IRA max income limits. There are no longer income limits for doing Roth IRA conversions. Also, note that many 401k plans now offer a choice between pre tax contributions and designated Roth (after tax) contributions and the employees can split their 16,500 max in any combination between those accounts.
http://www.retirementdictionary.com/definitions/rothira