Can You Contribute to 401k and IRA

Can You Contribute to a Roth IRA and 401K?

Can you contribute to a Roth IRA and 401k?  Yes, you can contribute to a Roth IRA and 401K at the same time.

In this post I’ll share my experience of simultaneously contributing to a Roth IRA and 401K, as well as the requirements you’ll need to meet in order to do the same.

When it’s time to get serious about your retirement, it’s not a stretch to imagine you might start thinking beyond your 401K. If you have a 401K at work, that’s great. Your employer cares about you and your ability to support yourself in retirement. If your employer is offering a matching contribution, well, you’ve struck gold. That’s free money. The next logical step is to consider a Roth IRA.

Before you consider a Roth IRA, you should be fully taking advantage of your company 401K. By that I mean contributing enough annual dollars to get the full match that the company offers. It’s likely that you are already doing that so let’s dive into the next step of also investing in a Roth IRA.

As a side note, if you don’t have a 401K, then consider reviewing the Difference Between Roth IRA and Traditional IRA.

Difference Between 401K and Roth IRA

Remember that the Roth IRA and 401K are just accounts where you keep your investments. They aren’t actual investments. They are just the account (or vehicle, as some put it) where the money is held. These accounts are great because they get special tax treatment.

You are able to contribute pre-tax dollars to a 401K. This means that no tax is taken from your money that is placed into the 401K. If you earn a dollar and put it in your 401K, you pay $0 in taxes on that dollar. If you earn another dollar and put it in your checking account instead, you have to pay taxes on that money.

There is a limit to your contribution though. It changes every year usually, but right now you can contribute $18,500 (2018) to your 401K.

You can’t contribute pre-tax dollars to a Roth IRA. You can only contribute dollars that have been taxed already. However, unlike a 401K, when you distribute that money to yourself in retirement, you don’t have to pay a tax. Nice, huh? For more on this account see the Roth IRA Explained.

401K and Roth IRA

Because the Roth IRA and 401K have opposite tax treatments, the IRS allows you to contribute to both at the same time. The only thing you have to worry about is the income limitation set on the Roth IRA. Your ability to contribute to a Roth IRA starts to “phase out” at $189,000 (2018) for those who file “married filing jointly”.

Here’s a strategy I follow. To contribute to both of these accounts, just make sure you start with contributions to the 401K to get the match. Then, switch to contributing to the Roth IRA. Once that is maxed out for the year ($5,500 for 2018), then you can go back to the 401K until you reach your annual limit there.

I did that for the tax years 2016 through 2017 and saw significant increased in my tax-advantaged retirement investing accounts. Not to mention, I have two different account with different distribution rules. So now I can consider things like using my Roth IRA for a down payment.

How about you, do you contribute to a Roth IRA and 401K at the same time?


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Safe Harbor 401k Plan

Safe Harbor 401k Plan

A safe harbor 401k plan is a unique type of retirement plan with two significant differences from a traditional 401k plan.  One, it requires mandatory employer contributions to employee accounts.  Second, it gives an employer an ability to offer a 401k plan to employees without any required discrimination testing.

The Safe Harbor 401k plan permits eligible employees to defer a portion of their salary to their own retirement plan account.  Employers then contribute to the participant’s account on behalf of eligible employees.  And, these employer contributions come in the form of either matching or non-elective amounts.

Safe Harbor 401k Plan Eligibility

Most any type of small business is eligible to establish and maintain a safe harbor 401k plan.  Sole proprietorships, LLC’s, partnerships, and corporations, including S corporations, are examples.

All eligible employees must be allowed to participate in the 401(k). An eligible employee is any one who:

  • is a minimum of 21 years old,
  • has performed one year of service and worked 1,000 hours in the year beginning with the date of hire.
  • Union employees and non-resident aliens without United States income may be excluded from participation in the plan.

One important thing to remember is that an employer may not establish more restrictive requirements than those listed above.  However, employers may set up less restrictive requirements for employee entrance into the safe harbor 401k plan.

Safe Harbor 401k Tax Benefits Tax Advantages

Employer contributions are tax deductible for the employer — up to 25% of compensation of all eligible participants.  Employee elective deferrals are excluded from the employee’s income for Federal Income Tax purposes.  Tax-deferred growth potential is possible — any investment earnings grow tax-deferred until withdrawn.

Vesting

Vesting refers to the participant’s ownership rights in the value of his or her retirement account.  Often, a traditional 401k plan required participants to wait a certain number of years before they can access the employer matching contributions. 

However, a safe harbor 401k is unique in comparison to other types of 401k plans in that all employee and employer safe harbor contributions are fully vested immediately.  There is no waiting period for employees to access the matching contributions made by employers.

Plan Deadline

Generally, the deadline to establish a new plan is anytime between January 1 and October 1 of the applicable year.

Contribution Flexibility

Under a safe-harbor plan, an employer can match each eligible employee’s contribution, dollar for dollar, up to 3% of the employee’s compensation, and 50 cents on the dollar for the employee’s contribution that exceeds 3 percent, but not over 5%, of the employee’s compensation.

Alternatively, employers may make a non-elective contribution equal to 3 percent of compensation to each eligible employee’s account. Non-elective contributions essentially means that contributions are made by employers to employee accounts regardless of employee contributions. 

Plan Compliance Issues

Because of the vested matching contributions required of the employer, the safe harbor 401k does not call for broad discrimination testing.  The safe harbor employer contributions stand in the place of discrimination testing.

Employee Benefits

  • Attracting and retaining key employees is easier with a 401k plan.
  • A 401k plan can help in providing retirement income for eligible employees.
  • Elected Roth contributions are allowed in safe harbor 401k plans.

Early Withdrawal Penalty

A 10% penalty is typically applied to all early distributions on safe harbor 401k plans, as well as traditional 401k plans.  Early distributions are distributions that occur before the age of 59½.

Using 401k For Down Payment On House

Using 401k For Down Payment – Is It Right For You?

After adding money to your 401k plan over several years, you may have built up a lot of money inside your 401k accounts. These accounts could be a desirable supply of funds for investing in a home. Nevertheless, there tend to be rules as well as restrictions upon withdrawals from the 401k accounts. Fortunately, there may be a way for you to make use of the money within your 401k plan. One great way is using 401k for down payment.

Some 401k programs allow participants to consider a loan from the funds inside the 401k. Usually, the 401k plan will limit the quantity of the loan to some certain percentage from the total balance. This implies that you cannot borrow all the money inside your plan, are just some of it. Nevertheless, this quantity may be significant enough to become useful for the long-term objectives.  Check out our 401k calculator to see the impact loans can have on future earnings.

Borrowing From 401k Plan

Using 401k For Down Payment Fidelity

Here’s a screenshot showing what loans you have available through your 401k plan if you’re using Fidelity.

When a person borrow money from the 401k plan, you borrow the cash from yourself. In additional words, the money is withdrawn out of your account as well as distributed for you.  That means there isn’t a credit check as well as your credit score doesn’t impact in your loan rate of interest.  This is because, there isn’t any risk in order to any lender.  You are repaying yourself. Actually, the curiosity you pay about the loan goes straight into your personal 401k accounts.  It does not go into any financial institution or loan provider.

Be Aware Of The Rules When Using 401k For Down Payment

However, it doesn’t mean you are able to control how so when you pay back the mortgage. The INTERNAL REVENUE SERVICE has requirements that must definitely be met concerning 401k financial loans. As this kind of, the plan may have a set rate of interest that you need to pay whenever you repay the actual loan. Additionally, you should make well-timed, regular obligations, just like every other loan. Usually, most 401k programs require that you simply make regular monthly obligations to be able to fulfill this particular requirement.

When using 401k for down payment you need to be aware of possible negative situations that may arise.  It is necessary that a person make your own 401k program loan obligations. While you will find no lenders involved, and therefore there isn’t any damage for your credit score or credit history, there could be substantial taxes repercussions with regard to failing to settle the mortgage as decided. Any mortgage principal that isn’t repaid is recognized as a distribution through the IRS. Which means that the entire amount associated with any delinquent loan stability is taxable because ordinary earnings. Even worse, if you’re under grow older 59 1/2, then your distribution is going to be considered an earlier distribution and could be susceptible to a 10 % tax fee.

“Using 401k For Down Payment Does Have Its Advantages!”

I would advice against using 401k for down payment, if you already have the cash sitting around.  Otherwise, the advantages of using 401k for down payment to purchase a house are extremely advantageous to many people. Nevertheless, it is essential to realize that though it is financing to yourself, it continues to be an actual loan, also it must end up being repaid. If you’re able to do do that, then borrowing using 401k for down payment can be a smart method to finance your house purchase.

 

 

rollover 401k to IRA

Rollover 401k to IRA?

What do I need to figure out before I decide on initiating a rollover 401k to IRA?

There are many factors involved before deciding on rolling over your 401k into an IRA.

4 Things To Know Before You Rollover 401k to IRA

1. What are the fees involved in keeping the 401k plan or rolling it over to an IRA? You need to make sure you are not going to be paying an exorbitant amount of fees with your new retirement accounts.

2. What matters more to me? The ability to have many more investment options and the ability to use a financial advisor to guide me on how to invest and how much to save, or would I rather be more limited to my investments in the 401k plan and pay less fees but have to manage everything myself?

3. Do I need to consolidate my assets together and be able to have a retirement account to make IRA contributions to? Remember, many times a 401k rollover to an IRA is not a reversible thing and if you do not know all of the facts you could be hurting yourself.

“4.Would it be better to roll my old 401k plan into my new employers 401k account?”

This is beneficial if you think you may want to use the 401k money you have to buy a house or maybe just use it to pay down some of your debt. Many 401k plans offer 401k loans and right now the interest rate is very low, and keep in mind the interest if only paid to yourself. If you cannot pay back the loan you will pay taxes on the money and probably a penalty, however if you do pay it back you have only paid interest to yourself and will not have any tax consequences. On the other hand, if you initiate a 401k rollover into an IRA, you cannot take a loan from an IRA account and will have to make a withdrawal.

The ability to take loans is a great beneficial factor in consolidating your 401k assets into your current plan, however if you do not need the money, more than likely the IRA, with the ability to provide more investment options, will be your best long term retirement strategy. Related Tools: 401k calculator

company sponsored 401k retirement plan

Should I invest in my Company Sponsored 401K Retirement Plan?

Should I invest in my Company Sponsored 401K Retirement Plan?

Should I invest in my company’s 401k plan? The answer is YES!!! Take advantage of your company sponsored 401k retirement plan.

Government programs for retirement income, like social security, are becoming very unpromising. And retirement healthcare has been so up in the air lately in the political world. So many changes…who can keep track?! And Company paid Pension Plans are almost extinct now, too!

Well one thing that I do know is that no one is guaranteed to pay for your future…except for you!

 

Reasons why to invest in your company sponsored 401k retirement plan

  • Most plans have a match % (which means they give you the matched amount for FREE! If you don’t invest at least the matched amount, you are missing out on free money!
  • The money is invested pre-tax, out of your paycheck before the taxes are taken out.
  • Yes, the plan is often based on funds that are based on the stock market (so there is some risk involved), but that means the potential for growth is big! Remember, the bigger the risk, the bigger the potential returns.
  • You do usually have the power to choose your risk and diversify! Many companies offer “safer” choices for employees nearing retirement (usually funds recommend to have more aggressive investment strategies when you are younger, and safer ones as you get older.
  • The fund always has an investment manager or help person that you can ask questions to! They can help you pick what is best for you, your family and your future!
  • You can use our free 401k calculator to find out how much money you should be saving, based on your age and expenses.

Have you been putting any money into your 401k, yet? Do you wish you would have started sooner?