The quick answer is yes, you can have both a 401(k) and an individual retirement account (IRA) at the same time. Actually, it is quite common to have both types of accounts. These plans share similarities in that they offer the opportunity for tax-deferred savings (and, in the case of the Roth 401(k) or Roth IRA, tax-free earnings). However, depending on your individual situation, you may or may not be eligible for tax-advantaged contributions to both of them in any given tax year.
If you (or your spouse, if you're married) have a retirement plan at work, your tax deduction for a traditional IRA may be limited—or you may not be eligible for a deduction, depending on your modified adjusted gross income (MAGI). You can, however, still make contributions.
If your income exceeds certain thresholds, you may not be eligible to contribute to a Roth IRA at all.
Key Takeaways
- If you have earned income, you can put money into both a 401(k) plan and an IRA.
- For 2023, a 401(k) lets you save $22,500 ($30,000 if you're 50 or over), and your company may match a portion of your contributions.
- For 2024, a 401(k) lets you save $23,000 ($30,500 if you're 50 or over).
- IRAs typically offer a wider variety of investment choices than 401(k)s.
- However, the IRS restricts IRA contributions to $6,500 (or $7,500) for 2023 and $7,000 (or $8,000) for 2024; your eligibility for a tax deduction may be limited by your income.
401(k) Benefits and Drawbacks
Many companies offer 401(k) retirement savings plans for their employees. The 401(k) has relatively large contribution limits, and employers will often match some or all of the money you contribute. If your company matches contributions, putting in at least enough to get the full employer match should always be a priority. Otherwise, you are leaving free money on the table.
Investments are limited to the options offered by the plan. While many companies now provide a large and diverse menu of investment choices, some 401(k) plans are still hindered by a narrow selection and high fees.
For 2023, the total amount of income you may contribute to a 401(k) is $22,500. For 2024, it rises to $23,000. For 2023, you may make an additional contribution of up to $7,500 if you're age 50 or over. For 2024, this additional contribution amount remains the same at $7,500. In some cases, your plan may restrict contributions to a lower amount.
IRA Benefits and Drawbacks
The investment choices for IRA accounts are vast. Unlike a 401(k) plan, where you're likely to be limited to a single provider, you can buy stocks, bonds, mutual funds, ETFs, and other investments for your IRA at any provider you choose. That can make finding a low-cost, solid-performing option easy.
However, the amount of money that you can contribute to an IRA is much lower than that for 401(k)s. For tax years 2023 and 2024, the maximum allowable contribution to a traditional or Roth IRA is $6,500 a year and $7,000, respectively. The catch-up contribution for 2023 and 2024 is $1,000 if you are age 50 or older. If you have both types of IRAs (traditional and Roth), the limit applies to your IRAs combined.
An added attraction of traditional IRAs is the potential tax deductibility of your contributions. But, the deduction is only allowed if you meet the modified adjusted gross income (MAGI) requirements. Also, it is subject to phase out if you have a workplace retirement plan and make a salary above a certain amount.
Traditional IRA Contribution Deductibility
2023
For single taxpayers covered by a workplace retirement plan, partial deductions are available for those within the salary phase-out range for 2023 of $73,000 to $83,000. For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $116,000 to $136,000. If you earn $83,000 (single filer)/$136,000 (married filing jointly) or more, contributions aren't deductible.
2024
For single taxpayers covered by a workplace retirement plan, partial deductions are available for those within the salary phase-out range for 2024 of $77,000 to $87,000. For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $123,000 to $143,000. If you earn $87,000 (single filer)/$143,000 (married filing jointly) or more, contributions aren't deductible.
Roth IRA Contribution Limits
Your MAGI may also limit your contributions to a Roth IRA. In 2023 single filers have to make below $153,000, and married couples filing jointly must make less than $228,000 to be eligible to contribute to a Roth IRA. These thresholds increase in 2024 when single filers must make below $161,000, and married couples filing jointly must make less than $240,000.
Having earned income is a requirement for contributing to an IRA, but a spousal IRA lets a working spouse contribute to an IRA for their nonworking spouse, making it possible for the couple to double their retirement savings.
Which Account Is Better?
Neither account is necessarily better than the other. They offer different features and potential benefits, depending on your situation. Generally speaking, 401(k) investors should contribute at least enough to earn the full match offered by their employers. Beyond that, the quality of investment choices may be a deciding factor. Should your 401(k) investment options be poor or too limited, you may want to consider directing further retirement savings toward an IRA.
Your income may also dictate which types of accounts you can contribute to in any given year, as explained earlier. A tax advisor can help you sort out what you're eligible for and which types of accounts might be preferable.
Advisor Insight
Stephen Rischall, CFP®, CRPC
1080 Financial Group, Los Angeles, CA
Yes, you can have both accounts and many people do. The traditional individual retirement account (IRA) and 401(k) provide the benefit of tax-deferred savings for retirement. Depending on your tax situation, you may also be able to receive a tax deduction for the amount you contribute to a 401(k) and IRA each tax year.
When you retire after age 59½, distributions will be taxed as income in the year they are taken. The IRS sets annual limits on how much you can contribute to a 401(k) and IRA. Roth IRA and Roth 401(k) contribution limits are the same as their non-Roth counterparts, but the tax benefits are different. They still benefit from tax-deferred growth, but contributions are made with after-tax dollars, and distributions after age 59½are tax-free.
How Much Can I Put in a Traditional IRA If I Have a 401(k)?
Like all other taxpayers, you're allowed to put up to the maximum allowed $6,500 (or $7,500 with the catch-up contribution) for tax year 2023, For tax year 2024, that's $7,000 (or $8,000).
How Does Having a 401(k) Affect IRA Contributions?
A retirement plan at work affects the degree to which your IRA contributions may be deductible from your taxable income. If you have no workplace retirement plan, then they're fully deductible. But if you have a 401(k), deductibility is limited (and ultimately disallowed) by annual salary levels. The IRS adjusts these levels yearly.
Which Account Makes More Sense, a 401(k) or an IRA?
They're both smart retirement investing vehicles for those who can contribute. Each allows for tax-deductible contributions and tax-deferred account value growth. If you have both, you may not be able to deduct your IRA contributions completely (or at all), but that doesn't negate their tax-advantaged value to your financial future.
The Bottom Line
If you have a 401(k) at your place of work, you may also open and fund annually a traditional IRA or Roth IRA (the latter, depending on your income level). While the tax deductibility of your traditional IRA contributions may be limited or prohibited, the combination of these accounts can boost your retirement savings throughout your working years. Take advantage of both if you can.
I am an expert in retirement planning and investment strategies, with a comprehensive understanding of 401(k) plans, individual retirement accounts (IRAs), and the associated tax implications. My expertise is grounded in practical knowledge and a deep understanding of the intricacies involved in optimizing retirement savings.
Now, let's delve into the concepts discussed in the article you provided:
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Simultaneous 401(k) and IRA Ownership:
- Yes, it is indeed possible to have both a 401(k) and an individual retirement account (IRA) simultaneously. Many individuals opt for this dual approach to maximize their retirement savings.
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Tax-Deferred Savings and Roth Accounts:
- Both 401(k)s and IRAs offer tax-deferred savings. Roth variants (Roth 401(k) and Roth IRA) provide tax-free earnings. The choice between traditional and Roth options depends on individual circ*mstances, tax brackets, and preferences.
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Eligibility and Income Considerations:
- Eligibility for tax-advantaged contributions to both accounts in a tax year depends on factors like modified adjusted gross income (MAGI) and participation in an employer-sponsored retirement plan.
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Contribution Limits:
- In 2023, the 401(k) contribution limit is $22,500 ($30,000 for those 50 or over), and for 2024, it increases to $23,000 ($30,500 for those 50 or over). IRA contribution limits are set at $6,500 (or $7,500) for 2023 and $7,000 (or $8,000) for 2024.
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Investment Choices:
- IRAs typically offer a broader range of investment choices compared to 401(k)s. This flexibility allows individuals to tailor their investment portfolios according to personal preferences and financial goals.
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Benefits and Drawbacks of 401(k)s:
- 401(k)s offer large contribution limits and employer matching, but investment choices may be limited, and fees can vary. Maximizing employer match is crucial to leverage this benefit.
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Benefits and Drawbacks of IRAs:
- IRAs provide diverse investment options, but contribution limits are lower than 401(k)s. Traditional IRAs offer potential tax deductibility, subject to MAGI and workplace retirement plan participation.
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Traditional IRA Contribution Deductibility:
- Deductibility of traditional IRA contributions is influenced by MAGI and workplace retirement plan participation. Phase-out ranges are specified for single and married taxpayers.
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Roth IRA Contribution Limits:
- Contribution limits for Roth IRAs are subject to MAGI limits. The article outlines income thresholds for eligibility in both 2023 and 2024.
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Considerations for Choosing Between 401(k) and IRA:
- The choice between a 401(k) and an IRA depends on factors such as employer match, investment options, income, and individual preferences. Both accounts offer tax advantages, and a strategic approach can enhance overall retirement savings.
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Expert Advisor Insight:
- The expert insight provided by Stephen Rischall emphasizes the tax-deferred savings benefits of both 401(k)s and IRAs. It underscores the importance of considering individual tax situations and retirement goals when deciding between the two.
In summary, the article provides a comprehensive overview of the nuances involved in managing both a 401(k) and an IRA, offering valuable insights for individuals seeking to optimize their retirement savings strategy.
