A Roth IRA is a retirement savings account that you set up on your own. A 401(k) is a retirement plan provided by your employer. The Internal Revenue Service sets separate contribution limits on Roth IRAs and 401(k) plans. These retirement plans also have distinct tax benefits, so the tax consequences of contributions are different.
Contributions to a 401(k) plan are exempt from taxes, except for Social Security and Medicare. You could contribute up to $17,500 to a 401(k) as of 2013. Employers may add up to $33,500 each year, which is also tax-deductible and brings the overall maximum to $51,000. Typically, an employer adds a predetermined percentage. Suppose your employer decides to match 50 percent of your contribution. If you contribute $5,000, your employer will kick in another $2,500. If you are 50 or older, you can add an extra $5,500, bringing your maximum contribution to $23,000 and the overall maximum to $56,500.
Roth IRA Contributions
Money that you put into a Roth IRA is not tax-deductible. The tax benefit comes later, because the money you take out after age 59 1/2 is tax-free. You could add $5,500 each year to a Roth IRA as of 2013. For people 50 and older, the limit was $6,500. The limit applies to contributions to all of your IRAs combined. For example, if you put $2,000 into a traditional IRA, the amount you can add to a Roth that year is reduced by $2,000.
There are no upper income limits for making contributions to 401(k) plans The IRS does set maximum income limits for contributing to a Roth IRA. If you file as single, the amount you can put in a Roth IRA starts to decrease, or "phase out," when your adjusted gross income reaches $112,000 as of 2013. The allowed contribution is zero once your income tops $127,000. For a married couple filing a joint tax return, the phase-out limits are $178,000 to $188,000. The phase-out range for those married and filing separate returns is zero to $10,000.
The IRS doesn’t consider money transferred from one retirement account to another to be a contribution. Provided your 401(k) plan allows transfers, this means you can continue to add money to a Roth IRA regardless of your income. You have to “convert” pretax 401(k) money into after-tax dollars by paying income taxes on the transferred funds going into the Roth. Once the money is in your Roth IRA, both it and all future investment earnings on it are tax-free when withdrawn according to IRS rules. There is no limit on the amount you can convert to a Roth IRA.