You can contribute to both a 401k and a Roth IRA at the same time. A 401k is an employer-sponsored plan. You can't own one individually. Anyone with income can have a Roth IRA. Combining both these types of accounts can allow you to maximize your retirement savings.
401k Matching Contributions
Many employers offer matching contributions to their 401k plans. In this case, if you put money into your 401k, your employer will make a contribution to your 401k as well. Your employer might match 50 percent of your contributions. So if you contribute $500 to your 401k, your employer will contribute $250. In this case, you should make the maximum contribution to your 401k before contributing to an IRA.
IRA Income Limits
You can only contribute to a Roth IRA if your income is below a certain level. For the 2010 tax year, a single person can only contribute to a Roth IRA if her annual income is less than $105,000. A married couple can contribute to a Roth IRA if their income is less than $166,000. A single person making between $105,000 and $120,000 is eligible to make partial contributions. Likewise, a married couple making between $167,000 and $177,000 is also eligible to make partial contributions.
Contributing to both a 401k and a Roth IRA is a great way to contribute more money to your retirement accounts. Both a 401k and a Roth IRA have annual contribution limits. The contribution limit varies from year to year and is adjusted based on inflation. You can make the maximum contribution to both a 401k and a Roth IRA in the same year. So if you've already maxed out your 401k, you can save more money by putting it into your Roth IRA.
You contribute to a Roth IRA after taxes. That way you won't have to pay taxes on that money when you withdraw it after you retire. If you invest wisely and your Roth IRA increases in value, you will not have to pay taxes on the gains from your investment. Your 401k will be taxed after you retire. If taxes are raised in the future, you will have already paid for your Roth IRA at a lower tax rate.