Can you have both a 401(k) and an IRA?
I am an Elite IRA Advisor with Ed Slott & Co (Ed is a CPA and is known nationally as an IRA expert). Here is one of the pieces I found on Ed’s website (that I have updated for 2017) on this topic.
There’s a common belief that if you have a 401(k) plan where you work and you contribute to it, you’re not allowed to also contribute to your IRA for the same year. But that’s not true; you’re allowed to contribute to both.
As far as IRA or Roth IRA contributions go, for 2017, the maximum that you can contribute is $5,500 if you’re under age 50 or $6,500 if you’re age 50 or older this year. In fact, you can contribute to both an IRA and a Roth IRA for the year, but the total limit is $5,550 (or $6,500). For example, let’s assume you’re age 60, working this year, and eligible to contribute the full $6,500 to a Roth IRA. If you decide to only contribute $4,000 to your Roth IRA, you could choose to contribute the remaining $2,500 to your IRA, bringing the total to $6,500.
Let’s also assume you have a 401(k) plan where you work. The maximum 401(k) contributions (also known as salary deferrals) you can make for 2017 are $18,000. If you are age 50 or older and your plan allows, you can also make catch-up contributions of an additional $6,000, making your total 401(k) contributions $24,000. Oftentimes, 401(k) plans have some plan-based restrictions on salary deferrals that might reduce the maximum dollar amount you can actually save. For example, your plan might need to limit your salary deferrals to pass certain IRS nondiscrimination tests.
Contributing to a 401(k) in no way limits your ability to make contributions to an IRA or Roth IRA. Roth IRA eligibility is only limited by your modified adjusted gross income and there are no income limits for contributing to a traditional IRA. The biggest limit really is how much money you can afford to contribute. If you can afford to contribute the maximum to both your 401(k) and IRA for 2017, then you can contribute a total of $23,500 ($5,500 + 18,000) if you’re under age 50 or $30,500 ($6,500 + $24,000) if your age 50 or older.
You can have both a 401(k) and an IRA and contribute to both accounts during the same year. But each type of account has its own contribution rules and tax advantages—especially when you contribute to both accounts. If you are making 401(k) contributions, you might be better off making contributions to a Roth IRA instead of a traditional IRA. Another option would be to contribute additional savings into an after-tax investment account instead of contributing to an IRA.
Those who make pre-tax contributions into their 401(k)s are able to decrease their taxable income. If you do so, you would also be able to contribute to a traditional IRA (up to $5,500 for those under age 50 and $6,500 for those 50 and over in 2017)—but the IRA contribution would not be tax deductible (I’ve included more information on 401(k) rules / limits below). A secondary contribution to an IRA would be considered an after-tax contribution; you would need to inform your CPA / tax preparer about the contribution to ensure this information is included on your tax return (specifically, in section 8606 on your tax return). If your employer does not provide a 401(k), then you can make an IRA contribution and have it qualify as a pre-tax contribution to decrease your taxable income.
Already contributing to a 401(k)? Consider these alternatives to traditional IRAs
If you are making a 401(k) contribution and receiving a tax deduction for it, I would suggest that you consider either making a Roth IRA contribution (if you qualify) or that you make contributions into an after-tax investment account. A contribution into a Roth IRA is made with after-tax funds, grows tax free and distributions from it are tax free, but income restrictions apply. Roth IRA contributions are a very smart way to save for your retirement if your earnings are below the income restrictions. You can make a full Roth IRA contribution (same rules as IRA) if you make less than $118,000 if you are single and $186,000 if you are married filing jointly. You can make a partial contribution if you make between $118,000–$133,000 if you are single and $186,000–$196,000 if you are married.
An alternative to making an IRA or a Roth IRA contribution is contributing savings into an after-tax investment account. The main reason to invest in this account would be to save for a house, future large purchases, education, or retirement. An after-tax investment account provides a lot of flexibility—and there are no penalties for distributions.
When you change jobs or retire, you can either leave your 401(k) plan in place if you have more than a $5,000 balance, transfer your 401(k) funds to your new company’s 401(k) plan, or rollover your funds into a Rollover IRA. It’s possible to have more than one 401(k) and more than one IRA at the same time, but it is normally easier to have fewer accounts to manage and monitor. Once account holders retire, they would normally rollover their 401(k) into a Rollover IRA so they can manage the account and start taking distributions.
The best options depend on your future goals
In summary—yes, you can have a 401(k) and IRA at the same time and make contributions into a 401(k) plan and an IRA during the same year. But I would suggest other options for your future plans. If your goal is to increase your long-term retirement plan holdings, making a Roth IRA contribution is a better option than making an IRA contribution because of Roth IRAs’ tax-free growth and tax-free distributions after 59.5 years of age.
If your goal is to save for a downpayment on a house, a large purchase, or retirement and you want to maintain flexibility, then saving in an after-tax investment account is the better option.
Limits on contributions into a 401(k)
An eligible employee under 50 years old is able to make a 401(k) contribution of $18,000 in 2017. An employee who will turn 50 in 2017 or is above 50 is able to make a contribution of $24,000. The $6,000 of additional funds that those over 50 are able to contribute is called the “catch-up.” This is designed for those who might have gotten a late start in saving for retirement. Regular contributions into a 401(k) plan are “pre-tax” contributions, which means these contributions decrease your taxable income and thus decrease the income taxes you pay to the federal (and possibly) state government. The funds you have invested in the 401(k) plan can grow tax-deferred.
If your company offers a 401(k) plan, I highly recommend that you make contributions to this account to build your long-term retirement funding. Making consistent contributions over a long period of time into a 401(k) will give you a better chance to succeed in meeting your retirement goals.
IRA contribution rules
If you are younger than 50, you can make an IRA contribution of not more than $5,500 in 2017. At age 50 or older, you can contribute up to $6,500. In both cases, all contributions must come from your taxable compensation for the year. An IRA contribution can be tax deductible if you do not have a retirement plan through your employer or are not eligible to make a contribution through your employer’s retirement plan.
IRS web link: IRA Contribution Limits & Rules
IRS web link: IRA Deduction Limits
Investors can have both a 401(k) and an individual retirement account (IRA) at the same time, and it is quite common to have both types of accounts. These plans share similarities in that they offer the opportunity for tax-deferred savings, or in the case of the Roth 401(k) or Roth IRA, tax-free savings. However, depending on your individual situation, you may or may not be eligible for tax-advantaged contributions to both of these accounts 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 entitled to a deduction – depending on your modified adjusted gross income (MAGI). Click here for an IRS chart to tell you where you stand.
401(k) Benefits and Drawbacks
A 401(k) retirement savings plan is offered to employees by many companies; it has large contribution limits, and in some cases, an employer-matching contribution for those who participate. If your company matches contributions, contributing enough to get the full employer match should always be your first step. Otherwise you are leaving free money on the table.
Investments are limited to the options offered by the plan. While many companies go to great lengths to expand the diversity of the funds offered, some 401(k) plans are still hindered by limited investment choices, high-cost fund options and poor performers.
For 2015 and 2016, the amount of income you can defer is $18,000, with a possible additional contribution of $6,000 if you're age 50 or over. Your plan may restrict contributions to a lower amount.
IRA Benefits and Drawbacks
The investment choices for IRA accounts are vast. Stocks, bonds, mutual funds and ETFs are all eligible for IRAs, which makes finding a low-cost, solid-performing option easy. However, annual contributions are limited by the IRS.
For 2015 and 2016, the maximum allowable contribution to an IRA is $5,500, or $6,500 if you are age 50 or older. An added feature of IRAs is the tax deductibility of contributions, but as discussed above, the deduction is only allowed if a person meets certain modified adjusted gross income (MAGI) requirements.
Which Account Is Better?
Neither account is necessarily better than the other, but they each offer different features. Generally speaking, 401(k) investors should invest at least enough to earn the full matching contribution offered by their employers. Beyond that, the quality of investment choices may be a deciding factor.
If 401(k) investment options are poor, investors may want to consider directing further retirement savings toward an IRA. It may come down to investor preference, but both 401(k)s and IRAs are available to all individuals with earned income. Those earning more – or those where the taxpayer or his/her spouse participate in a retirement savings plan at work – may have limitations on tax-deductible contributions to an IRA. Check with your tax advisor for further advice and where you should invest.
You can absolutely have both a 401(k) and IRA, and you should fund both accounts if you have the means. A 401(k) is the retirement plan provided by your employer, and an IRA is the saving from your own effort. Combined together, it is a powerful way to save for your future and minimize your annual tax bill along the way. For 2016, if you max out both saving limit ($18K for 401(k) and $5,500 for IRA), that’s $23,500 savings for your future. For a person who makes $156K, $23,500 represents 15% savings, which has been the recommended rule of thumb for personal savings for generations. Furthermore, assuming a single filing status, $18K in savings also represents a $5,040 tax savings at the 28% tax bracket, which in itself can almost fund your IRA. How awesome is that! Last tip—make the saving an automatic process as the more perfunctory the process it is, the less thinking/decision from you, and the more likely you will stick to it. Best!
Yes you can and many people have both.
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. If you are over the age of 50, you may make additional catch up contributions.
2016 maximum contribution:
- 401(k) = $18,000
- 401(k) with age 50+ catch up = $24,000
- IRA = $5,500
- IRA with age 50+ catch up = $6,500
Roth IRA and Roth 401(k) contribution limits are the same as their 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 59½ are made tax free.
There are different benefits and reasons you may want to consider making Traditional or Roth contributions. Here is a great resource from the IRS about IRA and Roth IRA contribution limits for employee plan participants.
Stephen Rischall, CRPC