I have contributed to a Roth IRA from January thru June 2021 (for a total 2021 contribution of $1500). I will begin a new job in July 2021 that offers a 401K (with matching benefits). I would like to maximize my 401K contributions to the max allowable for 2021. I do not want to be limited by the Roth max contribution because this is lower than the 401K annual max. How much can I contribute to my 401K for 2021? I know I cannot contribute to both Roth and 401K. Can I reset my 2021 contributions to apply the 401K maximum for 2021? Am I able to withdraw my Roth contributions for 2021 since I want to max out my 401K? Do I need to rollover my 2021 Roth contributions into my 401K to avoid Roth related limits?

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The fact that you are asking this question is amazing. Not that many people are either able or willing to contribute up to the limits allowed for retirement savings plans. So, great job of doing what you can to prepare for a successful retirement. The real question here is not whether you can max out your contributions to your new employer’s 401(k) plan (Answer: you can), but whether you can also contribute to a Roth IRA? (Answer: you may).

 

You would think that saving for retirement wouldn’t have to be so confusing. However, keep in mind that whenever taxes are involved, nothing is easy. That’s because the IRS wants some of your retirement savings in the form of taxes, either as you make contributions, or whenever you start taking money out. Anyway, we could talk all day about taxes and retirement, but back to your question. Here are the three steps to consider.

 

  • Step One. Go ahead and start make your contributions to your employer provided retirement plan, based on the current year contribution limits. For 2021 the limit is $19,500 plus $6,500 if you’re 50 or older.

 

  • Step Two. For 2021 the limit on annual contributions to an IRA is $6,000. The additional catch-up contribution limit for individuals aged 50 and over is $1,000. Now, you’ll need to see if you can contribute to a Roth IRA in addition to your 401(k). The fact that you are eligible for the 401(k) doesn’t affect your ability to contribute to a Roth IRA (the rules are different for traditional IRAs). What counts for Roth IRA contributions is how much you make. According to the IRS, for 2021 the income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household. For married couples filing jointly, the income phase-out range is $198,000 to $208,000. To help you figure out exactly whether you can contribute or not, there’s a handy resource called IRS Publication 590-A. Once on the link, open the PDF and look for the worksheet located around page 38. This will walk you through the calculation to see if you can contribute to a Roth, and how much. Note: There are probably online calculators for this, but I can’t vouch for their accuracy.

 

  • Step Three. What to do about the Roth contribution you’ve already made? Again, refer to Publication 590-A, page 33, and look for the section titled “Excess Contributions Withdrawn by Due Date of Return”. So, if from step two above you determine that you either can’t contribute to a Roth IRA at all, or have contributed too much, then as long as you withdraw the excess contribution and interest earned by the date your tax return for that year is due (including extensions), then you won’t be penalized.

Easy peasy! Thanks again for the great question, good luck to you going forward, and keep on saving for retirement.

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