Last updated on March 15th, 2025 at 07:43 pm

Can I open a 401(k) and a Roth IRA? Yes, but there are some limits. You are on the right track if you are thinking about opening both types of accounts. You can build wealth by contributing to both 401(k) and Roth IRA programs.

We will explore why you should have both types of accounts and how each works. Let’s start with discussing how each program works when it’s the only type of account you have. I will begin with the classic 401(k) plan

401(k) as a Sole Retirement Plan

A 401(k) is an employer-sponsored retirement plan that allows employees to contribute pre-tax dollars directly from their paychecks. For 2025, if the 401(k) is the only retirement plan, a single filer under age 50 can contribute up to approximately $23,000 per calendar year, with higher contribution limits available through catch-up contributions for those aged 50 or older.

Contributions made with pre-tax dollars reduce taxable income immediately, providing a valuable tax break while allowing funds to grow tax-deferred until retirement.

Key Features and Considerations:

Employer Match & Free Money: Many employers provide an employer match, which adds free money to retirement savings and significantly enhances the overall contribution.
Investment Options: The plan typically offers a range of investment choices, including mutual funds, exchange-traded funds (ETFs), index funds, and target-date funds. This variety allows for diversified asset allocation, which can be fine-tuned with the guidance of a financial advisor or investment adviser.
Tax Treatment & Withdrawal Options: Since contributions are made in pre-tax dollars, distributions in retirement are taxed as ordinary income at the prevailing tax rate. Withdrawals made before age 59.5 usually incur an early withdrawal penalty in addition to income taxes. Moreover, once the required minimum distribution age is reached, minimum distributions must be taken in accordance with IRS rules.
Loan Provision: Some 401(k) plans permit borrowing up to $50,000 for major expenses (such as buying a house), although these loans must be repaid with interest according to the plan’s terms.

This type of employer-sponsored retirement plan offers significant tax advantages and investment benefits, making it a cornerstone of many individuals’ retirement savings strategies.

Roth IRA as a Sole Retirement Plan

A Roth IRA is an individual retirement account funded with after-tax dollars. For 2025, if a Roth IRA is the only retirement plan, a single filer can contribute up to $6,500 per calendar year (or $7,500 with a catch-up contribution for those aged 50 or older).

Although contributions to a Roth IRA do not reduce current taxable income, the primary benefit is that qualified distributions are completely tax-free—ideal for those who may be in a higher tax bracket in retirement.

Key Features and Considerations:

After-Tax Contributions & Tax-Free Withdrawals: Contributions are made with after-tax dollars, and once the account meets the five-year rule and other qualified distribution requirements, all withdrawals are tax-free.
Wide Range of Investment Options: A Roth IRA hosted by a financial institution or brokerage firm offers investment choices such as mutual funds, ETFs, index funds, and target-date funds. Investment advisers or financial planners can provide additional investment advice to align the account’s asset allocation with long-term financial goals.
Flexibility and Withdrawal Rules: Unlike many other retirement accounts, contributions (but not earnings) can generally be withdrawn at any time without penalty. However, withdrawing earnings before reaching age 59.5 and without meeting the five-year rule may trigger both taxes and an early withdrawal penalty.
Income Limits: It is important to note that income limits and phase-out ranges may affect the maximum allowable Roth IRA contributions for individuals with higher gross income.

The Roth IRA’s tax-free withdrawal feature and flexible investment options make it an attractive choice for retirement savings, particularly when used in conjunction with other account types.

Combining a 401(k) and Roth IRA: The Best of Both Worlds

Using both a 401(k) and a Roth IRA creates a diversified tax strategy that optimizes overall retirement savings. With a 401(k), you contribute pre-tax dollars that lower your taxable income today while capturing employer contributions and benefiting from compound interest over time. In contrast, you fund a Roth IRA with after-tax dollars so that qualified distributions come out tax-free in retirement.

Benefits of This Combination

Tax Diversification
This strategy balances the immediate tax break from the 401(k) with the long-term advantage of tax-free withdrawals from the Roth IRA. It allows you to manage taxable income flexibly during retirement.

Enhanced Investment Strategy
Using both account types gives you access to a broad range of investment options—including mutual funds, ETFs, index funds, and target-date funds. You can tailor your asset allocation and manage risk effectively in response to market conditions.

Optimized Retirement Savings
Leveraging the strengths of both accounts helps you maximize retirement assets. This strategy takes advantage of employer contributions, considers income limits, and offers varied withdrawal options. Financial planners and tax advisors often recommend this dual approach to achieve specific financial goals and maintain a balanced investment strategy.

A Closer Look at Traditional IRAs

A traditional IRA offers distinct tax benefits as another type of individual retirement account. When you contribute to a traditional IRA, you may qualify for a tax deduction that lowers your taxable income in the current calendar year—especially if you fall into a lower tax bracket or lack access to an employer-sponsored retirement plan.

Key Aspects of Traditional IRAs

Tax Benefits & Deduction:
Your contributions can qualify for a tax deduction, reducing taxable income for that year. However, you will pay ordinary income tax on withdrawals during retirement.
Rollover and Consolidation Tool:
Many investors roll over funds from a 401(k) into a traditional IRA when retirement assets exceed the Roth IRA’s annual contribution limit. This strategy consolidates retirement savings and simplifies asset allocation decisions.
Investment Options and Minimum Distributions:
Traditional IRAs offer a variety of investment choices—such as mutual funds, ETFs, index funds, and target-date funds—but you must begin taking required minimum distributions at a designated age.
Strategic Conversion:
You can convert funds from a traditional IRA to a Roth IRA. Financial planners and tax advisors often recommend this move when you expect a higher tax bracket in retirement. This conversion shifts funds into a tax-advantaged environment, allowing tax-free withdrawals and enhancing overall retirement savings.

Why the 401(k) and Roth IRA Combination Prevails

Even though traditional IRAs provide valuable tax deductions and serve as an effective rollover tool, many experts prefer combining a 401(k) with a Roth IRA. The 401(k) leverages employer match and pre-tax contributions to build retirement assets, while the Roth IRA secures tax-free withdrawals and diversified investment options. This balanced approach manages taxable income efficiently and offers flexible withdrawal options—a cornerstone of sound financial planning.

Integrating a 401(k), a Roth IRA, and when appropriate, a traditional IRA creates a diversified, tax-advantaged pathway for retirement savings. By exploring options like mutual funds, ETFs, index funds, and target-date funds—and by leveraging insights from financial planners, investment advisers, and tax advisors—you can optimize your retirement strategy to fit your financial situation and long-term goals.

Saving requires discipline. Forgoing a $1,000 iPhone in favor of increasing Roth IRA contributions may seem challenging today, but the rewards for saving can prove tremendous over time.

A Comprehensive Strategy for Building Wealth

Building wealth starts by taking full advantage of tax-advantaged retirement accounts. Follow these steps to maximize contributions, then invest additional funds in a brokerage account to further boost wealth accumulation.

Step 1: Maximize the 401(k)

An employer-sponsored 401(k) plan forms a strong foundation for retirement savings. Contribute in pre-tax dollars to reduce taxable income and grow funds tax-deferred until withdrawal. Employers often add a matching contribution, which increases the account’s value.

Example:

Annual Salary: $80,000
Employer Match: 5% of salary ($4,000 per year)
Employee Maximum Contribution (2025): Approximately $23,000 for individuals under age 50
Total Annual Contribution (Employee + Employer): $23,000 + $4,000 = $27,000

Assuming a 7% annual growth rate in the equities market over 10 years, calculate the future value of the 401(k) contributions with the annuity formula:FV401k=27,000×(1.07)10−10.07FV401k=27,000×0.07(1.07)10−1

This calculation produces a future value of approximately $373,000 after 10 years.

Step 2: Maximize the Roth IRA

After securing the full employer match in the 401(k), contribute to a Roth IRA until reaching its legal annual limit. Fund the Roth IRA with after-tax dollars. While these contributions do not lower current taxable income, qualified distributions during retirement remain entirely tax-free.

Example:

Roth IRA Annual Contribution Limit (2025): $6,500 for individuals under age 50

Using the same 7% annual growth rate over 10 years, calculate the future value of the Roth IRA contributions:FVRoth=6,500×(1.07)10−10.07FVRoth=6,500×0.07(1.07)10−1

This yields a future value of approximately $90,000 after 10 years.

Step 3: Continue Funding the 401(k)

Once the Roth IRA reaches its annual limit, direct any additional contributions back to the 401(k) until you hit its maximum legal limit. This strategy extracts the full benefits of both pre-tax contributions (and the employer match) and the tax-free growth available in a Roth IRA.

Step 4: Invest Additional Funds in a Brokerage Account

If you have extra funds beyond the 401(k) and Roth IRA limits, open a brokerage account to invest after-tax dollars. Invest in a broad range of securities—such as mutual funds, index funds, ETFs, and more—to further enhance overall wealth accumulation.

A Numerical Summary of the Example

For an $80,000 salary and a consistent 7% annual growth rate over 10 years:

401(k) Future Value: Approximately $373,000
Roth IRA Future Value: Approximately $90,000
Combined Future Value: Approximately $463,000

This example demonstrates the power of maximizing tax-advantaged accounts and the impact of compound interest over time. Saving $463,000 in 10 years illustrates the benefits of these strategies early in your career.

Imagine starting at age 25 and saving until age 60. The long-term growth potential increases dramatically:

401(k) Future Value (35 years): Approximately $3,726,000
Roth IRA Future Value (35 years): Approximately $897,000
Combined Future Value (35 years): Approximately $4,623,000

This projection shows how consistently maxing out contributions, capturing employer matches, and benefiting from compound interest can lead to a future value of over four million dollars.

Assumptions and Caveats

These calculations rely on several key assumptions remaining constant over the 35-year period:

Stable IRS Contribution Limits: The IRS maintains the maximum annual contribution limits for both the 401(k) and Roth IRA.
Consistent Market Returns: The equities market generates an average return of 7% per year throughout the period.
Stable Employment and Employer Match: You remain with the same employer, and the employer continues to contribute 5% of your salary.
Continuous Maximum Contributions: You contribute the maximum allowable amounts to each retirement account every year.
Steady Market Conditions: The equities market experiences only occasional up-and-down swings, without any substantial long-term changes.
Funds Remain in the Account: You leave all funds in the accounts until age 60 to avoid early withdrawal penalties.

By following this structured approach and understanding the underlying assumptions, you can build a robust, tax-advantaged foundation for long-term wealth accumulation.

The end game

Years in the future when you have retired after age 59.5, you should work out a tax strategy to reduce the amount of income taxes due on withdrawals from your 401(k) plan which by that time you must roll over to your Roth IRA and/or a Traditional IRA.

When your employer tells you that you must close out the 401(k) plan because you are no longer an employee, you need to roll over the funds to a “qualified plan” which will be a Roth IRA or Traditional IRA.

You will quickly max out the contributions to the Roth IRA which means you will have to move the remainder of your 401(k) balance to your Traditional IRA. This will close out the 401(k) plan and leave you with the Roth IRA and the Traditional IRA.

At Retirement

From that point, your advanced tax planning will allow you to move funds from your Traditional IRA each year into your Roth IRA to the maximum contribution. Then you can move as much more of your existing funds from the Traditional IRA into a brokerage account. When you make a withdrawal from the Traditional IRA or the 401(k), you will be exposed to a potential tax bill.

Depending upon your income at the time, you may want to restrict the withdrawals from the Traditional IRA to keep your tax liability to a minimum. The point is to over time, remove all of the funds in your Traditional IRA and transfer them to your Roth IRA so that the funds in the Roth IRA can grow tax-free.

There is much more to discuss regarding this topic and if you are years away from retirement you have time to read some of our articles and learn about tax planning. One final point, keep an eye on the IRS, each year the IRS will permit a larger amount to be deposited into your retirement accounts as they adjust for inflation. If you can, increase your deposits to the new limits.

Self Employed

There are programs for self-employed to save. The SEP-IRA and other programs will help you if you are self-employed. Actually, these programs permit saving more than if you were employed using a 401(k) program. Read our article on this topic.