Can i contribute to a roth 401k and a traditional 401k

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A Roth 401(k) is an employer-sponsored retirement plan that’s funded by after-tax dollars. It shares certain similarities with a traditional 401(k) and a Roth IRA, although there are important differences to understand.

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Roth 401(k) vs 401(k)

Taxes and when you pay them are key to understanding the difference between a Roth 401(k) and a traditional 401(k).

You contribute to a Roth 401(k) after income tax is withheld from your paycheck, making so called post-tax contributions. When take money out of your Roth 401(k) account, you pay no income tax on the withdrawals.

Contrast this treatment with a traditional 401(k), where contributions are made pre-tax. The contributions are deducted from your paycheck before income taxes are withheld from your pay. Pre-tax contributions to a traditional 401(k) lower your taxable income, reducing the amount you pay in taxes today. When you take qualified distributions in retirement, you owe income tax on the withdrawals.

Deciding between a Roth vs Traditional 401(k) comes down to when you want to pay income taxes. Ask yourself when you’ll be in a higher income tax bracket: Today, as you’re making contributions—or years from now, when you withdraw money in retirement?

• If you believe your taxes will be lower during retirement, contributing to a traditional 401(k) may be a better strategy. Avoid higher taxes today, and pay lower income taxes when taking distributions.
• If you think that your income taxes are lower now, a Roth 401(k) might be a better choice. Pay lower income taxes on contributions you make now, and avoid higher income taxes later on. If you’re just starting out in your career and have a low salary and a low tax rate, contributing to a Roth 401(k) might make more sense.

Another thing to keep in mind: If your employer offers matching 401(k) contributions, they must be deposited in a traditional 401(k) account. Even if you’ve opted to contribute to a Roth 401(k), your employer’s matching contributions still are deposited in a separate traditional 401(k) account.

Roth 401(k) Contribution Limits

Both Roth 401(k)s and traditional 401(k)s have the same contribution limits. For 2022, the maximum employee contribution is $20,500, plus an extra $6,500 if you’re 50 or older. In 2023, employees may contribute up to $22,500, with additional catch-up contributions of $7,500 available for savers who will be 50 by the end of the year.

These limits are cumulative: If you have more than one 401(k) account—for instance, both a Roth 401(k) and a traditional 401(k), or 401(k) accounts with two employers after changing jobs—combined annual contributions to both accounts cannot exceed the limits.

The combined limit on employer matching contributions and employee contributions in 2022 is the lower of $61,000 or 100% of an employee’s compensation. For employees over 50, the combined limit is $67,500 in 2022, inclusive of the $6,500 catchup contribution. In 2023, the maximum is $66,000 or $73,500 if you are 50 or older.

If employer contributions do not carry you to the total contribution limit in a given year, some plans permit you to make non-Roth, after-tax contributions to a traditional 401(k).

Roth 401(k) Withdrawal Rules

There are three types of withdrawals from a Roth 401(k): qualified distributions, hardship distributions and non-qualified distributions. Each type has its own rules, pros and cons.

You can start making qualified distributions from a Roth 401(k) once you’ve satisfied two conditions: You’re age 59 ½ or older and you’ve met the five-year rule. This rule states that you must have made your first contribution to the account at least five years before making your first withdrawal. Note that if you retire and roll your Roth 401(k) balance into a Roth IRA that has been open for more than five years, the five-year requirement is met.

For example, if you started contributing to a Roth 401(k) at age 58, you would have to wait until you were 63 to begin making qualified distributions.

There are a few other conditions that allow you to withdraw money from your Roth 401(k) due to hardship, depending on the rules of your plan. These include:

• To pay for medical expenses that exceed 10% of your adjusted gross income.
• You become permanently disabled.
• If you’re a member of a military reserve called to active duty.
• If you leave your employer at age 55 or older.
• A “Qualified Domestic Retirement Order” issued as part of a divorce or court-approved separation.

Additionally, if you die, the full amount in your Roth 401(k) can be distributed to your named beneficiaries without penalty.

Roth 401(k) Early Withdrawals

You can withdraw funds from your Roth 401(k) early without meeting the conditions listed above—these withdrawals are non-qualified distributions.

If you’re not 59 ½, or you haven’t waited five years after making your first contributions, or you don’t qualify for a hardship withdrawal, you may have to pay income taxes and a 10% IRS tax penalty on some—but not all—of the amount you take out.

Here’s the tricky part: Early withdrawals must include both contributions and earnings, prorated based on the ratio of contributions to earnings in the account. Consider a Roth 401(k) with a balance of $20,000—$16,000 of which are contributions and $4,000 of which are earnings. Any early withdrawal from this account would therefore comprise 80% contributions and 20% earnings.

If our theoretical account holder took an early withdrawal, the 80% portion of the withdrawal that came from contributions would be free of tax and not subject to the 10% penalty. But the 20% portion comprising earnings would be taxed as regular income, and subject to a 10% tax penalty.

These rules provide additional flexibility to withdraw money from your Roth 401(k) in times of need and possibly pay fewer penalties that you would for a similar early withdrawal from a Traditional 401(k). However, it’s not a good idea to give up your hard-earned retirement savings and earnings in tax penalty payments, and early withdrawals from retirement accounts should always come last in a long list of alternatives.

Roth 401(k) RMDs

Like a Traditional 401(k), you must begin taking required minimum distributions (RMDs) from your Roth 401(k) by April 1st of the year after you turn 72. The amount of your annual RMD is calculated based on your account balance and your life expectancy.

When figuring out a withdrawal schedule that’s best for you, it’s a good idea to consult with a financial advisor. They can help you figure out how to balance your various RMDs and withdrawal rates, as well as help you balance them with Social Security benefits.

If you’ve reached age 72, one way to avoid RMDs is by rolling over your Roth 401(k) into a Roth IRA. However, it’s important to note that when you roll over the funds into a newly opened Roth IRA, you may have to wait another five years before you can begin taking qualified withdrawals. If you roll the funds into an already-established Roth IRA that’s been around for at least five years, there’s no wait.

Can You Take a Loan from Your Roth 401(k)?

If your plan rules allow it, you can take out a loan from your Roth 401(k) account. The rules for 401(k) loans are fairly uniform once the funds are distributed, but it’s up to your employer to decide whether they want to offer this benefit or not. They also decide who qualifies for a 401(k) loan.

There are risks involved with 401(k) loans. If you are laid off or quit while your loan is outstanding, you will need to repay the loan by the time you file taxes the year after you left your job. Taking advantage of all the possible extensions would mean you have until October 15th of the next year to repay the loan. Otherwise, the outstanding loan balance is considered as a non-qualified early withdrawal, subject to the 10% tax penalty.

Roth 401(k) vs Roth IRA

Both Roth 401(k)s and Roth IRAs are funded by after-tax contributions. And once you’ve owned either account type for at least five years, you’ll be able to start withdrawing money tax free after you turn 59 ½. But there are key differences between these two similarly named retirement accounts you need to know about:

• Contributions. The 2022 Roth IRA contribution limit is $6,000, with catch-up contributions of $1,000 permitted for savers who will be 50 or older by the end of the year. As noted above, Roth 401(k) annual contribution limits for individuals are much higher. Plus, you may also be eligible for employer contributions with a Roth 401(k)—just understand that matching contributions must be deposited in a traditional 401(k).
• Income. Roth 401(k)s contributions can be made by anyone, regardless of income—but there are income thresholds that limit who can contribute directly to a Roth IRA. Single people with 2022 modified adjusted gross income (MAGI) above $144,000, or married people with MAGI above $214,000, cannot make direct Roth IRA contributions.
• Availability. If you meet the eligibility and income requirements, anyone can open a Roth IRA and contribute up to the legal limits outlined above. Roth 401(k)s are only available from an employer.
• RMDs. When you turn 72, you must take RMDs from a Roth 401(k). Roth IRAs do not have RMDs—you can even leave the full balance untouched and pass the account to an heir. (If you’ve inherited a Roth IRA from someone other than a spouse, you may be subject to RMDs).
• Early withdrawals. If you’ve owned a Roth IRA for at least five years, you may withdraw your contributions penalty free before the age of 59½ (but not earnings, in most cases you’d pay the 10% tax penalty). Early withdrawals from a Roth 401(k) are more complicated, as outlined above.
• 401(k) loans. If you’d like to access the money in your Roth 401(k) and you don’t qualify for an early withdrawal, you can take out a loan from your account. That option is not available with a Roth IRA.

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