Can I Contribute To A 401(k) And An IRA?

An individual retirement account (IRA) and a 401(k) are both types of retirement plans that can help you save money for the future. While a 401(k) is an employer-sponsored account, an IRA is available to anyone looking to boost their retirement savings. The question is: Can you fund a 401(k) and IRA at the same time?

If you currently contribute or your spouse currently contributes to a 401(k) plan, you may also be able to open an IRA – but it’s important to consider a few limitations before doing so.

Let’s find out whether you can contribute to an IRA and a 401(k). Then, to help you decide what’s right for you, we’ll explore some of the pros and cons of opening both types of retirement plans. 

Can I Have An IRA And A 401(k)?

Yes, you can contribute to an IRA and a 401(k) up to the maximum contribution limits for both retirement plans. In 2023, the annual contribution for a 401(k) is $22,500 ($30,000 if you’re age 50 or older). For a traditional IRA, the contribution limit is $6,500 (or $7,500 if you’re age 50 or older). If you’re eligible, you can reduce your taxable income up to your maximum IRA contribution.

However, certain conditions determine whether your IRA contributions are tax-deductible. The Internal Revenue Service (IRS) places income limits on traditional IRA contributions. If you’re covered by your 401(k) plan or your spouse’s, you may not be able to deduct your IRA contributions from your taxable income.

You may be eligible for a full or partial deduction depending on the modified adjusted gross income (MAGI) range you fall under when filing your taxes. In other instances, you won’t qualify for any tax deduction – so it’s important to review the income limits before opening an IRA.

Keep in mind that you can still fund an IRA if you have a 401(k) or your spouse does, but these contributions are nondeductible. Funding a non-deductible IRA is just another way to grow your retirement savings. While your contributions won’t reduce your taxable income, they’re  tax-deferred – meaning the funds in your IRA will grow tax-free.

Can I Contribute To A Roth IRA And A 401(k)?

You can fund both a Roth IRA and a 401(k). The same rules that apply to a traditional IRA also apply for Roth IRA contributions and income limitations. Be sure to review the income limits on deductible versus nondeductible Roth IRA contributions before opening an account.

Income Limits On 401(k) And IRA Contributions For 2023

If you’re covered by both an IRA and a 401(k) plan, your MAGI or annual income determines whether your IRA contributions are tax-deductible. The table below shows your IRA tax deduction based on your filing status and IRS income limits for 2023.

Remember, the maximum annual contribution to a traditional IRA is $6,500 if you’re below age 50, and it’s $7,500 if you’re 50 or older. (IRAs have a $1,000 catch-up contribution.)

Pros And Cons Of Funding An IRA And A 401(k)

Are you trying to decide if it’s worth having a 401(k) and IRA at the same time? Let’s take a look at some of the advantages and disadvantages of funding both an IRA and a 401(k) plan. 

Pros

If you’re already covered by a 401(k), opening an IRA retirement plan at the same time can still have some benefits. Advantages of having both retirement accounts include:

• Increased retirement savings: Contributing to more than one retirement account maximizes your overall retirement savings, which can help you feel even more prepared when it’s time to retire.
• Employer matching with 401(k)s: Most employers match employee contributions to 401(k) plans. Typically, employers will match 50 cents to the dollar or dollar for dollar up to a certain amount of money. Many consider this “free money,” so it can be an important perk to take advantage of.
• Multiple investment options with IRAs: An IRA gives you the ability to choose from a wide variety of investments, including mutual funds, stocks, bonds and other securities.
• Tax-deferred contributions: Contributions to both your IRA and 401(k) are tax-deferred. This means you don’t have to pay taxes on the money you contribute to each account until you make withdrawals. So, your retirement savings can grow tax-free.
• Potential for catch-up contributions: You may benefit from catch-up contributions if you’re contributing to an IRA and a 401(k) at age 50 or older. The catch-up contribution is $1,000 for IRAs and $7,500 for 401(k)s.

Cons

Contributing to a 401(k) and IRA also has a few downsides. Here are some of the common disadvantages associated with having an IRA and a 401(k) at the same time.

• IRA contributions possibly not being tax-deductible: The biggest downside to having both an IRA and a 401(k) is that income limits determine whether your IRA contributions are tax-deductible. Depending on your income, you may not qualify for a deduction at all.
• Limitations on types of 401(k) investments: Your employer picks the different securities you can choose to invest your 401(k) in. Sometimes, this list of investments is limited, so you won’t have many options to choose from.
• Required minimum distributions (RMDs): You have to start withdrawing money from your IRA and 401(k) every year after reaching a certain age. According to the IRS, you must start taking your required minimum distribution (RMD) in the year you turn 72 years old. You may be able to delay taking your RMD depending on your specific retirement plan.
• Early withdrawal fees: If you withdraw funds from your IRA and/or 401(k) plan before reaching 59 ½ years old, you’ll owe a 10% tax penalty. So, if you withdraw $10,000 from an IRA or 401(k) before you’re 59 ½, you’ll have to pay a $1,000 (or 10%) early withdrawal fee. According to the IRS, you should keep some exceptions to the 10% tax in mind.

The Bottom Line: Contributing To Both A 401(k) And An IRA Is Possible

The biggest caveat to having an IRA at the same time as a 401(k) is that the IRS has income limits on IRA contributions. So, depending on your MAGI, you may not be able to deduct your IRA contributions from your taxable income.

Despite this downside, it’s still possible to open an IRA in addition to a 401(k) plan. Funding both accounts is a great way to boost your overall retirement contributions. If you’re eligible, you can even contribute up to the maximum annual amount for both retirement plans.

Are you looking for a way to track all of your retirement contributions and investments? Download the Rocket Money℠ app to manage your retirement accounts in one place.