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 (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).
- If you have earned income you can have both a 401(k) and an IRA—or Roth versions of these retirement accounts.
- A 401(k) plan lets you save $19,000 a year and your company may match a portion of your contributions, but investment options are often limited and fees may be high.
- IRAs offer a wide variety of investment choices, but the IRS limits contributions to $6,000 a year and—if you or your spouse has a retirement plan at work—your tax deduction on those contributions may be limited or phased out entirely if your MAGI is too high.
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 2019, the amount of income you can defer is $19,000, 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 2019, the maximum allowable contribution to a traditional or Roth IRA is $6,000, or $7,000 if you are age 50 or older. If you have both types of IRAs, the limit applies to all of your IRAs combined.
An added feature of traditional IRAs is the tax deductibility of contributions, but as discussed above, the deduction is only allowed if you meet certain modified adjusted gross income (MAGI) requirements. Your MAGI may also limit your contributions to a Roth IRA. In 2019, single filers have to make below $137,000, while married couples filing jointly have to make less than $203,000.
Having earned income is a requirement for contributing to an IRA, but a spousal IRA circumvents the rule by allowing a working spouse to contribute to an IRA for a nonworking spouse.
Which Account Is Better?
Neither account is necessarily better than the other, but each of them offers different features. Generally speaking, 401(k) investors should invest at least enough to earn the full match offered by their employers. Beyond that, the quality of investment choices may be a deciding factor.
If the 401(k) investment options are poor or limited, you 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 who earn more—or those (or their spouses) who 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 on what you're eligible for and where you should invest.
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 59½ are tax free.