Retirement Funds

[Shoedog112]

I’ve been participating in my company sponsored 401k program for 35 years but curious to know if I’m able to open a Roth IRA account as well? I know there are contribution limits to retirement accounts but considering that it’s post-tax, do the same guidelines apply?  Not a financial expert by any means, but just curious on ways to save more. I’ve got a good nest egg with my 401K but know it will be taxed upon withdrawal. I’ve got a lot of money invested in stocks and bonds as well. 

[Beancounter]

Roth IRA: What It Is and How to Open One

WWW.INVESTOPEDIA.COM

A Roth IRA is a special individual retirement account (IRA) in which you pay taxes on contributions, and then all future withdrawals are tax-free.

Here’s a link to one of my favorite websites dealing with financial topics.   It will explain a lot about Roth IRAs.
 

Based on the information you provided, you are eligible to open a Roth IRA.  Having earned income qualifies you to contribute funds to a Roth.  If, on the other hand, you had only passive income you would not be able to contribute funds to a Roth.  You could convert existing traditional IRA funds to a Roth but that’s an entirely different situation 

Edited January 5 by Beancounter

[KeepItReal]

2 hours ago, Shoedog112 said:

I’ve been participating in my company sponsored 401k program for 35 years but curious to know if I’m able to open a Roth IRA account as well? I know there are contribution limits to retirement accounts but considering that it’s post-tax, do the same guidelines apply?  Not a financial expert by any means, but just curious on ways to save more. I’ve got a good nest egg with my 401K but know it will be taxed upon withdrawal. I’ve got a lot of money invested in stocks and bonds as well. 

I agree with our resident bean counter! ( @Beancounter) 

There are income limits for a Roth IRA - you can make too much money to qualify...but there are ways around it. Most firms use a financial firm to administer their 401k - like Vanguard, Fidelity or Empower.  These firms often offer free advice and you can ask to speak to an advisor about a Roth - just don't let them talk you into doing a rollover (moving money from your 401k to an IRA). If you like podcasts - the Moneygirl podcast has episodes on retirement accounts that will be an hour well spent, before you talk to an advisor. 

[+ Vegas_Millennial]

9 hours ago, Shoedog112 said:

I’ve been participating in my company sponsored 401k program for 35 years but curious to know if I’m able to open a Roth IRA account as well? I know there are contribution limits to retirement accounts but considering that it’s post-tax, do the same guidelines apply?  Not a financial expert by any means, but just curious on ways to save more. I’ve got a good nest egg with my 401K but know it will be taxed upon withdrawal. I’ve got a lot of money invested in stocks and bonds as well. 

It just depends on if your company has voted to allow a Roth version in their 401k.  Most companies have by now, but a few haven't.

About a decade ago, I asked by HR Benefits Manager about a Roth 401k at our company. After about 6 months of asking, he says we didn't do it because it would cost IT to modify the Oracle payroll software to allow it, and it just wouldn't be worth their costs if fewer than 50 employees were interested in the Roth 401k.  At our next annual Benefits seminar, I raised my hand to ask the crowd about interest in a Roth 401k and, sure enough, hundreds of employees were interested.  A few weeks later we had a Roth 401k and the HR Benefits Manager called me first to let me know it was available before announcing to the rest of the employees.

 

[+ Vegas_Millennial]

12 hours ago, Shoedog112 said:

I’ve been participating in my company sponsored 401k program for 35 years but curious to know if I’m able to open a Roth IRA account as well? I know there are contribution limits to retirement accounts but considering that it’s post-tax, do the same guidelines apply?  Not a financial expert by any means, but just curious on ways to save more. I’ve got a good nest egg with my 401K but know it will be taxed upon withdrawal. I’ve got a lot of money invested in stocks and bonds as well. 

I misread your question.  I previously posted about a Roth 401k, which is not the same as a Roth IRA that were you asking about

[Shoedog112]

I was hoping there was a workaround to qualify if you earn more than the maximum allowed. I’m not finding anything so it looks like I’m out of luck for now. 

[+ Vegas_Millennial]

12 hours ago, Shoedog112 said:

I was hoping there was a workaround to qualify if you earn more than the maximum allowed. I’m not finding anything so it looks like I’m out of luck for now. 

Yes, there is a workaround. It's called a "Backdoor Roth IRA".   I've been doing it every year since 2020 when my income surpassed the limits to contribute to a Roth IRA directly.

You first contribute to a traditional/non-deductible IRA, and then immediately (maybe one day later after the funds transfer) transfer everything from the traditional IRA to the Roth IRA.  As long as you (1) didn't have any other existing money in the traditional IRA from previous years, and (2) didn't earn or lose money during the time the money sat in the traditional IRA, it's very easy and costs no additional money in taxes.  You just fill out IRS Form 8606 at the end of the year, telling the IRS you removed all the money from the traditional IRA the same year you put in in, it didn't grow, and you didn't deduct the money from your income therefore you don't owe taxes on the transfer.

Important things to remember:

1. Completely empty the traditional IRA account every year by December 31.

2. Keep the money in the traditional IRA in cash, or money market, and only for a short while (like 24 hours), so it doesn't grow in value.  You'll have to pay taxes on anything that grows in value while it stays in the traditional IRA.

 

 

Edited January 6 by Vegas_Millennial

[Shoedog112]

Thanks for the info! Now it’s time to shop around for a financial institution!

Edited January 7 by Shoedog112

[Bokomaru]

As mentioned above be sure to check income limitations. Bear in mind that if you execute a backdoor Roth and then cross the income limits in that same year, you will have a tax nightmare to deal with. 
Doing something like selling a piece of real estate can cause that (as happened to a family member of mine), or getting an unexpected raise (as happened to me). 

Congress came close to closing the backdoor Roth loophole not long ago. It violates the spirit of the Roth’s purpose. I won’t be surprised if they do succeed in stopping the backdoor Roth in the near future. 

[handiacefailure]

With a backdoor IRA make sure you don't have any other IRA's before opening or you could really get dinged.   Suze Orman did a suze school podcast a few weeks ago you can find where she talks about it.

I don't really understand why they have an income limit anyway on a roth IRA seeing there isn't one for a roth 401K.   I'm fortunate enough to have a roth option for my 401K that was added two years ago, but would have loved a higher contribution limit for the IRA for those years I didn't have a roth 401K option.

If you qualify for a roth IRA, I'd put the max in you can for the match into the 401K since it's basically free month and the next $8K into a roth IRA and then go back to the 401K for additional money.   

Some companies also have the option for a roth 401K match to be taxed instead of going into a traditional account and you can avoid paying taxes on those earnings as well