Today’s question comes from Katy who called into the podcast…
“I have a question about Roth 401k. I have a TSA retirement plan through my company. And since this is a Roth from my company does that mean the amount I contribute for both the traditional and Roth account is part of the limit of $23,000 contribution for 2024. Or is the Roth contribution a part of the $7,000 limit? ”
Matt & Joel’s response: This is a good question. It’s really confusing because there’s a smorgasbord of retirement account options out there and all different contribution limit amounts that change each year. And it’s especially confusing when some of these accounts share part of the same name!
The quickest answer to your question is this: You can contribute $23,000 to your Roth TSP (which is the federal employee equivalent of the 401k for folks out there who don’t know what a TSP is) AND you can contribute $7k towards a Roth IRA. The limits are separate.
Here’s a longer breakdown to help clarify…
TSP & 401k Plans
A TSP (Thrift Savings Plan) is a retirement plan for federal government employees. It’s similar to a private company 401k in terms of tax benefits, contribution limits, etc.
In 2024, the contribution limit for 401ks is $23,000. This is for personal contributions. If your company does any matching, they can put in matching funds over and above the $23k limit.
The $23,000 contributions can be either Roth, or traditional contributions. That’s if your company offers a Roth option, of course. Some only offer traditional 401k contributions.
Most people favor one or the other, either Roth or traditional. But it is possible to make both types of contributions. As long as the overall limit isn’t exceeded with the combination.
For example, you could make $10,000 in regular 401k contributions, and $13,000 in Roth 40k. As long as the total contribution amount doesn’t add up to over $23,000 this year, you’re golden.
IRAs
Individual Retirement Accounts (IRA’s) are completely separate from 401ks. They can also be either Roth or Traditional, and they also share a contribution limit.
The limit for IRA contributions in 2024 is $7,000.
Again, people typically favor one or the other. Traditional or Roth. But it’s possible to put money into both accounts as long as the combination doesn’t exceed the $7,000 limit.
We’re partial to the Roth IRA for most investors.
Funding both 401k and IRA
Since both of these types of accounts are separate, it’s possible to fund BOTH of them!
So you can put $23,000 into a 401k, AND $7,000 into an IRA this year. That’s $30,000 you’re able to stuff into tax advantaged accounts this year, woohoo!
If you have access to a Roth 401k, they can be really powerful. For the average American saver, Roth’s make a lot of sense because all that money will never be taxed again.
But if you’re in a really high income bracket today, traditional 401ks might make more sense.
Catch up contributions
The only people who have different contribution limits are folks 50 and over. They’re allowed to make catch-up contributions.
This basically means they can put an additional $1,000 into their IRA, and an additional $7,500 into their TSP, 401k, or 403b. (This is the 2024 catch-up limit, and the number gets a little higher each year)
So all in all, people over 50 can potentially invest as much as $38,500 across both accounts, which is incredible!
The Bottom Line:
401ks have a contribution limit of $23,000 this year. IRA’s have a contribution limit of $7,000. They are separate accounts and both offer Roth and Traditional versions.
While the tax treatment is different, from a contribution limit standpoint, it doesn’t matter whether you choose to put in Roth or traditional dollars. The limits are separate for your 401k and IRA.
So Katy, you can essentially put $30k total into tax-advantaged retirement accounts this year.
Also, massive props to you for prioritizing your Roth TSP instead of the traditional one! It means paying more tax now, but future-you will be thankful for the absent tax bill in those retirement years.
For the full version of this discussion, check out Podcast Episode #865 (it’s the 3rd question in the episode)
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