The quick answer is yes, you can have both a 401(k) and an individual retirement account (IRA) at the same time.
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.
Key Takeaways
- If you have earned income, you can put money into both a 401(k) plan and an IRA.
- For 2024, a 401(k) lets you save $23,000 ($30,500 if you're 50 or older).
- IRAs typically offer a wider variety of investment choices than 401(k)s.
- However, the IRS restricts IRA contributions to $7,000 (or $8,000, if you're 50 or older) for 2024.
- Your eligibility for an IRA tax deduction may be limited by your income.
401(k) Pros and Cons
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 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 2024, the total amount of income you may contribute to a 401(k) is $23,000. ($22,500 in 2023). For 2024 and 2023, you may make an additional contribution of up to $7,500 if you're age 50 or older.
IRA Pros and Cons
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 2024 and 2023, the maximum allowable contribution to a traditional or Roth IRA is $7,000 a year and $6,500, respectively. The catch-up contribution for 2024 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. However, the deduction is only allowed if you meet the modified adjusted gross income (MAGI) requirements. Also, it is subject to a phase-out if you have a workplace retirement plan and make a salary above a certain amount.
Traditional IRA Contribution Deductibility
2024
For single taxpayers covered by a workplace retirement plan, partial deductions are available for those within the salary phase-out range for 2024 of $77,000 to $87,000. For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $123,000 to $143,000. If you earn $87,000 (single filer)/$143,000 (married filing jointly) or more, contributions aren't deductible.
2023
For single taxpayers covered by a workplace retirement plan, partial deductions were 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 was covered by a workplace retirement plan, the phase-out range was $116,000 to $136,000. If you earned $83,000 (single filer)/$136,000 (married filing jointly) or more, contributions weren't deductible.
Roth IRA Contribution Limits
Your MAGI may also limit your contributions to a Roth IRA. In 2024, single filers must make below $161,000, and married couples filing jointly must make less than $240,000 to be eligible to contribute to a Roth IRA. In 2023, single filers had to make below $153,000, and married couples filing jointly had to 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.
Advisor Insight
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 59½are tax-free.
How Much Can I Put in a Traditional IRA If I Have a 401(k)?
You're allowed to put up to the maximum allowed: $7000 (or $8,000 with the catch-up contribution if you're 50 or older) for tax year 2024. For tax year 2023, it was $6,500 (or $7,500 for those 50 or older).
How Does Having a 401(k) Affect IRA Contributions?
A 401(k) affects the degree to which your traditional IRA contributions may reduce your taxable income. If you have no 401(k), then there's no change: the contributions reduce your taxable income. 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 potentially advantageous retirement investing vehicles for those who can contribute. If you have both, you may not be able to deduct your IRA contributions completely (or at all), depending on your income, 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 a traditional IRA or Roth IRA (the latter depends on your income level). While the tax deductibility of your traditional IRA contributions may be limited or prohibited based on your income, the combination of these accounts can boost your retirement savings throughout your working years. Take advantage of both if you can.
