Yes, You Can Have a Roth IRA and a Roth 457: Double Your Tax-Free Retirement Savings

Are you trying to maximize your retirement savings and wondering if you can have both a Roth IRA and a Roth 457 plan? The short answer is yes, you absolutely can! And doing so might be one of the smartest financial moves you’ll ever make.

I’ve been researching retirement options for years, and I’m excited to share how combining these two tax-advantaged accounts can supercharge your retirement strategy. Let’s dive into everything you need to know about this powerful combination.

Understanding the Basics: Roth IRA vs. Roth 457

Before we go deeper, let’s clarify what these accounts actually are:

Roth IRA

• An individual retirement account you open yourself
• Funded with after-tax dollars
• Tax-free growth and tax-free withdrawals in retirement
• Available to anyone with earned income (subject to income limits)
• 2024 contribution limit: $7,000 ($8,000 if you’re 50+)

Roth 457

• An employer-sponsored retirement plan
• Only available through certain employers (government agencies, nonprofits)
• Traditional version uses pre-tax contributions, but Roth version uses after-tax dollars
• Tax-free withdrawals in retirement (when qualified)
• 2024 contribution limit: $23,000 ($30,500 if you’re 50+)

The biggest similarity? Both offer the amazing benefit of tax-free growth and withdrawals in retirement when you follow the rules

Why You Might Want Both Accounts

When I first learned I could contribute to both plans simultaneously, it was like finding money I didn’t know I had! Here’s why this combo makes so much sense:

1. Higher total contribution limit – Instead of choosing one or the other, you can contribute the max to both ($30,000+ combined annually)

2. Diversified tax treatment – Having both types gives you more flexibility in retirement

3. Different withdrawal rules – 457 plans have unique early withdrawal benefits

4. No income limits on 457 plans – Even if you earn too much for a Roth IRA, you can still do a Roth 457

As one of my colleagues likes to say, “It’s not about choosing the best account – it’s about using all the good ones strategically!”

The Magic of Contribution Limits

One of the biggest advantages to having both accounts is simply the ability to save more for retirement in tax-advantaged accounts. Let’s look at how much you could potentially save in 2024:

That’s potentially $38,500 per year going into tax-free retirement accounts if you’re over 50! And remember, that’s money that will grow and be withdrawn completely tax-free in retirement (assuming you follow the rules).

Qualification Requirements: Can YOU Have Both?

Not everyone qualifies for both accounts. Here’s what you need:

For a Roth IRA:

• Earned income
• MAGI (Modified Adjusted Gross Income) below certain thresholds:
  • 2024: Phase-out begins at $146,000 for single filers; $230,000 for married filing jointly
  • Completely ineligible above $161,000 (single) or $240,000 (married)

For a Roth 457:

• Employment with an organization that offers a 457 plan (typically state/local governments or non-profits)
• Your employer must offer the Roth option (not all do)
• No income limits! This is a major advantage

If your income is too high for a Roth IRA, you might still be able to use the “backdoor Roth IRA” strategy, but that’s a topic for another day!

Tax Advantages: The Best of Both Worlds

The tax benefits of this combo are worth emphasizing. With traditional retirement accounts, you get a tax break now but pay taxes later. With Roth accounts, you pay taxes now but get tax-free growth and withdrawals.

Here’s why this matters:

1. Tax diversification – Nobody knows what tax rates will be in the future
2. No Required Minimum Distributions (RMDs) with Roth IRAs – More flexibility in retirement
3. Potential for lower lifetime tax burden – Especially if you expect to be in a higher tax bracket in retirement

I personally prefer having some money in both traditional and Roth accounts for maximum flexibility. It’s like having both cash and credit cards when you travel – options are always good!

Special Withdrawal Rules Worth Knowing

One major difference between these accounts is when and how you can access your money:

Roth IRA Withdrawal Rules

• Contributions (but not earnings) can be withdrawn anytime, tax and penalty-free
• Earnings can be withdrawn tax and penalty-free if:
  • Account is at least 5 years old, AND
  • You’re 59½ or older (with exceptions for first-time home buyers, disability, etc.)

Roth 457 Withdrawal Rules

• Generally, withdrawals are penalty-free once you leave your employer (regardless of age!)
• Must be qualified distributions for tax-free treatment (similar 5-year rule as Roth IRA)
• Subject to Required Minimum Distributions (RMDs) at age 73 (unlike Roth IRAs)

This early withdrawal flexibility with 457 plans is a huge advantage for early retirees. It’s why many government employees who plan to retire before 59½ prioritize their 457 plans.

Strategic Ways to Use Both Accounts

If you’re lucky enough to qualify for both accounts, here’s how I’d recommend prioritizing your contributions:

1. First, capture any employer match – If your employer offers any matching on your 457 contributions, grab that free money first!

2. Next, max out your Roth IRA – The flexibility of Roth IRAs makes them extremely valuable

3. Then, contribute more to your Roth 457 – Especially valuable if you plan to retire early

4. If you still have money to save – Consider other options like HSAs or taxable brokerage accounts

Remember, this is just a general guideline – your personal situation might call for a different approach.

Real-World Example: Meet Sarah

Let me share a quick example to show how this works in practice:

Sarah is a 45-year-old city government employee making $85,000/year. She wants to retire at 57. Here’s her strategy:

1. She contributes $7,000 annually to her Roth IRA
2. She puts $15,000 annually into her employer’s Roth 457 plan
3. Total annual retirement savings: $22,000

When Sarah retires at 57, she can immediately start taking penalty-free withdrawals from her Roth 457 plan. Then at 59½, she can access all her Roth IRA earnings tax-free as well.

By retirement, assuming a 7% annual return, Sarah will have approximately:

• Roth IRA: $236,000
• Roth 457: $505,000
• Total: $741,000

And the best part? It’s ALL tax-free in retirement!

Common Questions About Having Both Accounts

I get tons of questions about this combination, so let me address the most common ones:

Q: Will contributing to one affect my ability to contribute to the other?
A: Nope! The contribution limits are completely separate. You can max out both if you qualify.

Q: Which should I prioritize if I can’t afford to max out both?
A: It depends on your situation, but generally: capture any employer match first, then consider the Roth IRA for its flexibility.

Q: Can I roll my Roth 457 into my Roth IRA when I leave my employer?
A: Yes, you can! This is a great way to avoid RMDs on your Roth 457 money.

Q: Is there a penalty if I withdraw from my Roth 457 before 59½?
A: Unlike most retirement accounts, there’s no early withdrawal penalty for 457 plans once you leave your employer – regardless of age! This is a huge advantage.

Potential Downsides to Consider

While I’m a big fan of this combo strategy, I should mention a few potential drawbacks:

1. Investment options – Your 457 plan might have limited investment choices compared to a Roth IRA

2. Administrative fees – Some 457 plans charge higher fees than what you’d pay with a low-cost Roth IRA provider

3. Complexity – Managing multiple accounts requires more attention

4. Saving too much in tax-advantaged accounts – If you need access to funds before retirement, having too much locked away can be problematic

Despite these concerns, I still think the benefits far outweigh the drawbacks for most people.

My Final Thoughts

Having both a Roth IRA and a Roth 457 plan is like having your cake and eating it too – tax-wise, anyway! The ability to save more for retirement in tax-advantaged accounts is a powerful wealth-building tool.

For government employees and non-profit workers especially, this combination can be the difference between a comfortable retirement and an extraordinary one. If you qualify for both, I strongly encourage you to take advantage of this opportunity.

Remember, retirement planning isn’t just about saving – it’s about saving smart. And using both a Roth IRA and a Roth 457 is definitely a smart move.

Have you been using this strategy? I’d love to hear your experiences or answer any questions you might have!

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Disclaimer: While I’ve done my best to provide accurate information, tax laws and retirement plan rules can change. Always consult with a qualified financial advisor or tax professional before making significant financial decisions.