Q. My 401(k) plan offers a Roth 401(k) option. I am allocating all of my salary deferrals to the Roth 401(k). Can I also continue to contribute to my Roth IRA?
A. Maybe. Participation in an employer plan does not disqualify you from contributing to an IRA or a Roth IRA – as long as you meet the requirements for making those contributions.
First of all, you must generally have earned income. There’s a good chance you meet that requirement since you are participating in a 401(k) plan offered by your employer.
Secondly, to make a Roth IRA contribution you must meet certain income limits. In 2014, if you are married filing jointly, your ability to make a Roth IRA contribution phases out between $181,000 - $191,000. If you are single or filing as the head of household, the phase-out is between $114,000 - $129,000. Congress does not like those who file married-separate. Their phase-out range is $0 - $10,000 of income. Those amounts are not your adjusted gross income (AGI), they are modified adjusted gross income (MAGI). To see what the definition is of MAGI, see IRS Publication 590.
This means that a married couple with MAGI less than $181,000 can each contribute up to $17,500 to a Roth 401(k) and up to $5,500 to a Roth IRA. That’s a total of $23,000 each ($17,500 + $5,500). And if they are both age 50 or older, they can take advantage of the catch-up contributions in both accounts. That’s an additional $5,500 in the Roth 401(k) and $1,000 in the Roth IRA, for an additional total of $6,500 each. This is not very likely, but possible.
On the IRA side, you can participate in your employer plan and also make an IRA contribution. Again, you generally must have earned income, and there are no income limits, but for an IRA, you cannot make contributions beginning in the year you turn age 70 ½.
Here the question is not whether or not you can make the contribution, but whether or not you can deductthe contribution. If you are covered by an employer plan, your ability to deduct the contribution in 2014 phases out between $96,000 and $116,000 if you are married filing jointly, or between $60,000 and $70,000 if you are filing as single or head of household. If you are not covered by a plan but your spouse is, the phase-out ranges are different. For married filing jointly, the range is $181,000 - $191,000 and for those who are married but file separately, the phase-out range remains at $0 - $10,000. This is not AGI, but is MAGI.
Even if you cannot deduct the IRA contribution, you can still make the contribution. If you make a non-deductible contribution, be sure you file Form 8606 with your tax return to tell IRS that you have made an after-tax contribution. Otherwise, when you go to take the funds out, you will be taxed again. Also, you cannot take out only the after-tax funds in your IRA. All of your IRA distributions will be partly taxable and partly non-taxable. The formula for this calculation is on Form 8606.
A final note: although we are talking about Roth 401(k)s here, the information is the same for Roth 403(b) and Roth 457(b) accounts as well as the Roth feature in the government’s Thrift Savings Plans (TSPs).