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.
- If you have earned income, you can put money into both a 401(k) plan and an IRA.
- For 2022, a 401(k) lets you save $20,500 ($27,000 if you're 50 or over), and your company may match a portion of your contributions.
- For 2023, a 401(k) lets you save $22,500 ($30,000 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 $6,000 (or $7,000) for 2022 and $6,500 (or $7,500) for 2023; 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 2022, the total amount of income you may contribute to a 401(k) is $20,500. For 2023, it rises to $22,500. For 2022, you may make an additional contribution of up to $6,500 if you're age 50 or over. For 2023, this additional contribution amount rises to $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 2022 and 2023, the maximum allowable contribution to a traditional or Roth IRA is $6,000 a year and $6,500, respectively. The catch-up contribution for 2022 and 2023 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
For single taxpayers covered by a workplace retirement plan, partial deductions are available for those within the salary phase-out range for 2022 of $68,000 to $78,000. For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $109,000 to $129,000. If you earn $78,000 (single filer)/$129,000 (married filing jointly) or more, contributions aren't deductible.
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.
Roth IRA Contribution Limits
Your MAGI may also limit your contributions to a Roth IRA. In 2022 single filers have to make below $144,000, and married couples filing jointly must make less than $214,000 to be eligible to contribute to a Roth IRA. These thresholds increase in 2023 when single filers must make below $153,000, and married couples filing jointly must make less than $228,000.
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.
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.
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 $6,000 (or $7,000 with the catch-up contribution) for tax year 2022, For tax year 2023, that's $6,500 (or $7,500).
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.