Ask the grumpies: IRA limits and 401K limits?

Katie asks:

I just started a new job in which for the first time, my employer offers to match my contribution to retirement.  I already have a personal Roth IRA, and I’m trying to untangle contributions limits, etc.  I know the total amount you can contribute to all Roth IRA accounts is $5,500, but does that also include the employer contribution?  E.g. If I personally contribute $5,500 to both accounts and my employer adds their contribution, will I be over the limit?  What about contribution limits to a Roth IRA versus a traditional IRA?

To our knowledge, your employer shouldn’t be offering to do anything with your (personal) IRA.  Also to our knowledge, the IRA limits are completely separate from your work contribution limits.  The IRA is an individual retirement account.  Your employer will offer a 401(K), a 403(b) or a SIMPLE IRA.  Wikipedia has a nice table comparing 401Ks to IRAs.

So if your income is low enough to max out the personal IRA, you can max out the IRA and your 403(b) and your 457.  You have separate limits for IRA vs. 403(b).  If you have a 401K, those limits are the same as for the 403(b).  Here’s a table with the number limits.   In 2014, the limit for employee contributions is 17,500.  You would also be able to add the full amount to the IRA on top of that.  (And if you have a 457, you can add 17,500).

Employer contributions limits are different than employee contributions.  Wikipedia says that the employer + employee limit for 2014 is the lesser of 100% of your income and $52,000 [update: corrected– it doesn’t look like they can do 52K and you can do 17.5K… again, talk to someone who knows these things if you’re in this situation].  Where it might matter what you do is the income limits– if you make enough money you may not be able to contribute to a Roth IRA or get any tax credit for a traditional IRA.  In that case you could put money in a traditional IRA and then back-door convert it to a Roth.

If your employer is offering a SIMPLE IRA, then you can contribute up to $12,000 in 2014 and your employer can contribute either 2% of your salary or match 3% of your salary, with a cap of $260,000 for 2014.  You would still be able to max out your personal IRA on top of whatever you do with the SIMPLE IRA.

Standard disclaimers apply– we’re not tax attorneys, talk to real experts, etc.  Probably the best people to talk to about this stuff are the relevant HR people at your place of employment.

Addendum from Katie:

I have a personal Roth IRA which I began some years ago and as a graduate student, I was never eligible for any benefits or to receive matching funds from my employer.  Now I have started a postdoc, and am eligible to receive retirement benefits.  My employer offers a 403(b) Savings plan and a 403(b) Roth.  I would prefer the 403b Roth because I would rather pay taxes on the smaller, present amount, than the future, larger amount.  I know, however, that there is a limit to the amount you can contribute to a Roth IRA.  So my question was in several parts I guess.  One, what is the difference between a 403b Roth and a Roth IRA?  Two, is the contribution limit applied individually to all Roth accounts, such that you can contribute up to the limit to each account, or does the limit apply to your contributions to all of your Roth accounts added up together?  And three, are there differences when the account is a personal one versus an employer account?

The Fidelity rep informed me that the limits apply individually to each account, so I can contribute the maximum to each if I could afford it.  I’m still unclear, however, on what the difference between the types of accounts and how personal accounts differ from employer accounts.

Think of the 403(b) as a bucket and the individual IRA as a different bucket.  You can fill either bucket with Roth or traditional funds in any mix (subject to income limits you probably aren’t hitting as a post-doc), but the 403(b) bucket will only hold $17,500 this year and the IRA will only hold $5,500 this year.  (Next year you get slightly bigger buckets).  Only your employer can give you the 403(b) bucket, and you need to be making at least 17.5K (otherwise they can only give you a smaller bucket).  You need to make at least 5.5K to put money in your IRA bucket.  If you are making more than 23K/year then you can legally max both out (though you may want to do things like eat).  I’m not sure if you’re allowed to max both out if you’re only making 17.5K/year (as in, can you double count the 5.5K).  I doubt many people are in that situation since most people need to say, eat.

Roth just means, as you noted, that you pay taxes now and not later, whereas traditional means you lower your taxable income for this year but have to pay taxes on earnings in the future when you will hopefully be in a larger tax bracket.  Roth vs. Traditional doesn’t mean anything for how much you can save (at least in the first order sense, you can actually save slightly more with one of them because of how taxes are taken into account, but it hurts my brain to think of which one… in reality it isn’t as important as what tax bracket you think you’ll be in in the future compared to now).

 Does that answer your question?

5 Responses to “Ask the grumpies: IRA limits and 401K limits?”

  1. Leah Says:

    I assume a 403(b) Roth is different from a Roth IRA.

    I’d do whatever you need to do to get the maximum match you can. If you’re confused by your options, go to your HR person and have them talk you through it all.

    I’ve got a standard 403(b), and I slowly increase the contributions to that. I made sure to start with contributing enough to capture the entire match I get (3% of my salary), and I’ve gone up from there quite a bit. I doubt I can max it out, because, y’know, eating and all that jazz. I’ve also got a Roth IRA, and I do max that one out, since $5.5k feels like a good, doable goal.

    The key is to save as much as you can. If you get a match, save to capture the entire match first.

    This comment represents 90% of my knowledge of retirement. Oh, invest in index funds! There you go — 100% of my retirement investing knowledge.

  2. Angela Says:

    I’ve wondered – is the limit on employer contributions per account (403(b) and 457) or total across all accounts? Not that it is likely to ever be a problem for me… :)

    • nicoleandmaggie Says:

      I don’t know the answer to that! From Wikipedia, it looks like the total limit for all contributions for all work accounts is the lesser of 52K or your total pre-tax compensation. But it doesn’t specifically say anything about 457 plans. My 457 plan doesn’t come with a match.

  3. Rosa Says:

    these are also questions you should be able to ask any competent HR department, and if you don’t ask the person in charge of payroll should make sure you don’t overpay anything with an employer match, anyway. My husband generally hits the 401(k) cap and then the last few weeks of the year his paycheck is just bigger because they stopped with the 401(k) contributions.

    I’d say “his poor payroll person figures it out” but I bet it’s actually built into their software.


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