Can I Contribute to an IRA and 401(k)?

Financial planning for retirement often leaves people grappling with a variety of choices, from selecting investment portfolios to deciding on suitable savings vehicles. 

One question that is likely to come to light is, "Can I contribute to an IRA and 401k in the same year?" 

The short answer is yes, but there are many details to take into consideration. Learning more about both types of accounts will arm you with the knowledge needed to maximize your financial security in your golden years. 

What is an IRA?

An Individual Retirement Account (IRA) is a tax-advantaged savings account designed to help you save for retirement. Unlike a 401(k), which is offered through an employer, you can open an IRA independently through various financial institutions. The contribution limit for 2023 is $6,500 or $7,500 if you are age 50 or older. 

IRAs come in several varieties, each with unique tax benefits:

1. Traditional IRA: Contributions are often tax-deductible, but withdrawals in retirement are taxed as regular income.
2. Roth IRA: Contributions are made with after-tax dollars, but withdrawals in retirement are tax-free.
3. SEP IRA: Designed for self-employed individuals and small business owners, it offers higher contribution limits compared to Traditional and Roth IRAs.

By understanding the distinct features of each type, you can decide which type of account suits your financial situation and retirement goals.

What is a 401(k)?

A 401(k) is an employer-sponsored retirement savings plan that allows employees to save a portion of their paycheck before taxes are taken out. 

Unlike an IRA, you can only contribute to a 401(k) if your employer offers one as a part of your benefits package. The contribution limits are generally higher than those for IRAs. 

For 2023, the maximum amount you can contribute is $22,500 or $30,000 if you are age 50 or older. Employers often match a portion of your contributions, providing an additional incentive to save.

Contributions are typically made pre-tax, which means you'll owe taxes when you withdraw the funds in retirement. 

Eligibility Criteria for IRA and 401(k) Contributions

When it comes to IRAs, there are a few key eligibility factors to consider:

1. Age: There is no minimum age for contributing to a Traditional or Roth IRA, but you must have earned income. However, Traditional IRAs have an age cap; you cannot make contributions in the year you turn 72 or afterward.
2. Income: Roth IRAs have income limitations. For 2023, if you're single and your modified adjusted gross income (MAGI) is more than $153,000 or if you are married filing jointly and it's over $228,000, you cannot contribute to a Roth IRA. Traditional IRAs do not have income limits for contributions, but the tax deductibility of your contribution may be phased out if you or your spouse has access to an employer-sponsored retirement plan and your income exceeds certain thresholds.
3. Other retirement plans: Contributing to a 401(k) or other employer-sponsored plan does not disqualify you from contributing to an IRA. However, as noted above, it may affect the tax deductibility of your Traditional IRA contributions.

Now, here’s the criteria for contributing to a 401(k).

1. Employment status: You must be an employee of a company that offers a 401(k) plan to be eligible to contribute. Some employers may also require you to complete a certain period of service before you can participate.
2. Employer-imposed restrictions: Some employers set specific criteria that must be met to receive employer-matching contributions, such as working a minimum number of hours or achieving certain performance milestones.
3. Enrollment periods: Employers often have specific enrollment periods during which you can start contributing to or make changes to your 401(k) account. Missing these windows may delay your ability to contribute.

Simultaneous Contribution to an IRA and 401(k)

You can contribute to both an IRA and a 401(k) in the same tax year. While there are several advantages to doing so, there are also some potential drawbacks. 

Advantages

1. Higher savings ceiling: By contributing to both types of accounts, you can save more than the limit of either account individually. For instance, in 2023, you could stash away $22,500 in a 401(k) and an additional $6,500 in an IRA, potentially boosting your retirement nest egg significantly.
2. Tax diversification: A Traditional 401(k) and Roth IRA combo allows you to hedge against future tax uncertainties. You'll have one account to draw from that's tax-free in retirement (Roth IRA) and another that will be taxed (Traditional 401(k)).
3. Investment choices: IRAs provide a wider range of investment options compared to employer-sponsored 401(k)s. Using both gives you more control over your investment strategy.
4. Employer match: If your employer matches your 401(k) contributions, that's essentially "free money" you'd miss out on if you only contribute to an IRA.

Strategies for Maximizing Contributions

1. Start with the match: Contribute enough to your 401(k) to get any employer match. This is a 100% immediate return on your investment.
2. Max out Roth IRA: If eligible, max out your Roth IRA next to take advantage of tax-free growth and withdrawals.
3. Back to 401(k): After maxing out the Roth IRA, circle back to your 401(k) and try to contribute up to the limit.

Limitations and Pitfalls

1. Affordability: The biggest hurdle for most people is being able to afford to contribute to both accounts, especially when aiming for the maximum allowed.
2. Tax deductibility: Contributing to a 401(k) could affect the tax benefits of a Traditional IRA, especially if you're a high earner or your spouse has a workplace retirement plan.
3. Complexity: Managing multiple accounts can be complex and may require a more meticulous approach to asset allocation and rebalancing.

Things to Consider Before Investing Into Both Retirement Accounts

With that information, let’s review the things you should consider before investing in both retirement accounts.

Tax Implications

Contributing to Traditional IRA and 401(k) accounts provides immediate tax benefits by reducing your taxable income for the year. This strategy could lower your annual tax bill and even place you in a lower tax bracket. The funds in these accounts also grow tax-deferred until they’re withdrawn in retirement, at which point they are taxed as regular income.

Roth IRAs and Roth 401(k)s operate differently. Contributions are made with after-tax dollars and don't reduce your current taxable income. However, these accounts offer tax-free growth and withdrawals in retirement, making them a strategic choice if you anticipate higher taxes in your later years.

The type of account you choose — Traditional or Roth — can significantly impact both your current tax liabilities and your long-term retirement savings. Selecting the right one for your situation allows you to maximize your retirement growth potential while optimizing your tax benefits.

Matching Contributions from Employers for 401(k) Accounts

Many employers match contributions to 401(k) accounts. It's critical to contribute enough to capture this full match before considering other retirement accounts like an IRA.

To maximize your retirement savings, ensure you're getting the full 401(k) match before contributing to an IRA. This approach diversifies your retirement investments while optimizing potential growth.

Strategies for Approaching IRA and 401(k) Contributions

Here are some tips and suggestions for approaching both types of contributions:

1. Financial goals: Assess your financial goals and risk tolerance to decide how aggressively you should be saving.
2. Personal circumstances: Consider your income level, tax situation and other financial commitments when deciding how much to contribute and to which account.
3. Professional advice: If you're unsure about where to start, consider consulting a financial adviser for personalized guidance.

Open an IRA Today With Benzinga’s Top Retirement Accounts

If you’re interested in opening an IRA, Benzinga’s list of top retirement accounts is a good jumping-off point. 

Use an IRA and 401(k) to Save for Retirement

Contributing to an IRA and a 401(k) can supercharge your retirement savings by offering tax benefits, a higher total contribution limit and diversified investment options. 

Always take full advantage of employer 401(k) matches before branching out to an IRA to ensure you're optimizing your potential for financial growth. By understanding the specific advantages and limitations of each account, you can strategically navigate your way to a more secure and prosperous retirement.

Frequently Asked Questions