If you contribute to your 401(k) account, you may still contribute to a Roth IRA and/or a traditional IRA, as long as you meet the IRA's eligibility requirements. However, if you wish to contribute to a traditional IRA and take a tax deduction for that contribution, depending on your income, your contribution to your employer's 401(k) plan may hinder your ability to do so. But It will not affect the amount you are able to contribute (up to an annual $5,500/$6,500 if you’re age 50 or older, for 2018; up to $6,000/$7,000 for 2019).

Key Takeaways

  • Investors who allocate parts of their wages to 401(k) accounts may still contribute money to Roth IRAs and/or traditional IRAs.
  • Single individuals must only calculate the contributions that pertain directly to them. But those who are married and filing jointly, must consider whether their spouses contribute to their employer plans.

Factors to Consider

If you are covered by a 401(k) or any employer-sponsored plan, your modified adjusted gross income (MAGI) becomes a factor in the deductibility of IRA deposits. For example, In 2018, single taxpayers covered by plans cannot take an IRA deduction if their MAGI is $73,000 or more. Those making more than $63,000 but less than $73,000 can take a partial deduction. Those making $63,000 or less can take a full deduction – regardless of their 401(k) participation. For 2019, those figures rise by $1,000: no deduction for an MAGI of $74,000 or more; partial deductions for more than $64,000 and less than $74,000 and full deductions for $64,000 or less.

Publication 590-A from the IRS explains the deductibility of IRA contributions, providing the formula you need to calculate how your 401(k) plan contributions affect your IRA contributions. If you are single, you must only calculate your own contributions. But if you are married and filing jointly, you must consider whether your spouse contributes to his or her employer plan and any deductible IRA contributions he or she makes. Calculate your IRA contributions and your spouse’s contributions separately using the worksheet that is available on the IRS website.

If you complete the worksheet and discover that some or all of your IRA contributions are nondeductible, you may wish to take out the amount you overcontributed. There is no additional tax or penalty to remove the excess contribution as long as you do so before you file your taxes for the year in which the contribution was made.

Furthermore, any investment gain or income you made on the contribution also must be added to your gross income for the year and may be subject to a 10% early withdrawal penalty if you are under 59½. For these reasons, it is wise to determine your eligibility for IRA contributions before you make them.

In short, depending on your income, participating in a company 401(k) can limit your ability to deduct contributions to an individual retirement account. If you or your spouse are active participants in an employer-sponsored plan, you must follow a formula to determine whether you may make deductible traditional IRA contributions.