Can you contribute to a 401(k) and IRA? The short answer is yes, it’s possible to have a 401(k) or other employer-sponsored plan at work and also make contributions to an individual retirement plan, either a traditional or a Roth.
If you have the money to do so, contributing to both 401(k) and IRA plans could help you fast track your retirement goals while enjoying some tax savings. But your income and filing status may affect the amounts you are allowed to contribute, in addition to the tax benefits you might see from a dual contribution strategy.
Before you ask yourself, “Can I contribute to a 401(k) and IRA?”, learn more about the guidelines and restrictions when combining these two types of accounts.
Can I Contribute to a 401(k) and an IRA?
It’s a legitimate question to ask if you’re just getting started on your retirement planning journey. For example, if you’re already contributing to a plan at work, you may be wondering if you can also save money in an IRA.
Or maybe you opened an IRA in college but now you’re starting your career and have access to a 401(k) for the first time. You may be unsure whether it makes sense to keep making contributions if you’ll soon be enrolled in your employer’s retirement plan.
Having a basic understanding of 401(k)s and IRAs can help you make the most of these accounts when planning your retirement strategy.
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Can I Have a 401(k) and a Traditional IRA?
Traditional IRAs offer the benefit of tax-deductible contributions. The money you deposit is pre-tax (meaning, you don’t pay taxes on those funds), and contributions grow tax-deferred so you pay tax when making qualified withdrawals in retirement.
Opting for the tax deduction these tax-deferred plans provide might appeal to you if you’re in a higher tax bracket during your working years and want to minimize your tax liability now.
It’s possible to make contributions to a 401(k) at work and a traditional IRA. The IRS doesn’t have any rules that prevent you from making contributions to both. But there are limits on the amount of IRA contributions you can deduct in this scenario.
Specifically, a full deduction of the amount you contribute to an IRA is allowed if:
• You file single or head of household and your modified adjusted gross income (MAGI) is $68,000 or less
• You’re married and file jointly, or a qualifying widow(er), with an MAGI of $109,000 or less
A partial deduction is allowed for incomes over these limits, though it does eventually phase out entirely.
Can I Have a 401(k) and a Roth IRA?
Roth IRAs allow you to make contributions using after-tax dollars. This means you don’t get the benefit of deducting the amount you contribute from your current year’s taxes. The upside of Roth accounts, though, is that you can make qualified withdrawals in retirement tax-free.
You might choose to contribute to a Roth IRA and a 401(k) if you anticipate being in a higher tax bracket when you retire, because of the tax-free benefit. But there’s a catch: Your ability to contribute to a Roth IRA is based on your income. So how much you earn — not necessarily your enrollment in a retirement plan at work — could be a deciding factor in answering the question, can you have a Roth IRA and 401(k) at the same time.
For 2022, you can make a full contribution to a Roth IRA if:
• You file single or head of household, or you’re legally separated, and have a modified adjusted gross income of less than $129,000
• You’re married and file jointly, or are a qualifying widow(er), and your MAGI is less than $204,000
Similar to traditional IRA contributions, the amount you can contribute is reduced as your income increases until it phases out altogether.
💡 Recommended: What Other Types of Retirement Accounts Are There?
As you work your way through the nuts and bolts of retirement funding, it’s important to keep why you’re doing this at the forefront. Quality planning for retirement can help you to meet your lifestyle goals in your post-working years.
As you get started planning your retirement savings, it’s a good idea to determine the estimated age you can or would like to retire, as the timing can influence other choices — like how much you choose to save and what investments you might pick.
For some people, the idea of retiring early is attractive. If that’s true for you, factor that into your planning. Others plan to work into their 70s — but on their own terms, perhaps involving part-time hours, telecommuting, or consulting. You might want to rough out a couple of different scenarios to see which one feels most comfortable.
There are plenty of resources available online, including SoFi’s retirement calculator to help you determine potential retirement timelines.
Differences Between IRA and 401(k) Funds
Although both IRAs and 401(k)s are retirement savings accounts, there are some important differences to know. The main one is that a 401(k) is an employer-sponsored retirement plan that allows both the employee and employer to contribute to the account. IRA are Individual Retirement Accounts that anyone can set up for themselves. There are two main types of IRAs: Traditional and Roth.
Sometimes employers offer matching contributions to 401(k) accounts up to a certain percentage point or dollar amount. If your company offers a 401(k) option, it is worth taking advantage of it — after all, a matched contribution is essentially extra money for retirement at no cost to you.
If you are self-employed, you can open a solo 401(k), with similar guidelines to a traditional 401(k).
Here’s a closer look at key differences between 401(k) plans and IRAs.
A 401(k) plan can be funded by employer and employee contributions. Here are the annual 401(k) contribution limits for 2022:
• $20,500 for employee contributions
• $6,500 in catch-up contributions for employees age 50 or older
• $61,000 limit for total employer and employee contributions ($67,500 for catch-up contributions)
IRAs are funded solely by individual contributions. Here are the annual contribution limits for traditional and Roth IRAs for 2022:
• $6,000 for regular contributions
• $1,000 catch-up contributions for savers aged 50 and older
These limits apply to total IRA contributions. So if you have more than one IRA, the most you could add to it in a single year is $6,000 or $7,000 if you’re 50 or older.
Both 401(k) plans and IRAs can offer tax benefits. Here are the key tax benefits to know when contributing to these plans:
• 401(k) contributions are tax-deductible
• Traditional IRA contributions can be tax-deductible for eligible savers
• Roth IRA contributions are not tax deductible, but Roth plans allow you to make tax-free withdrawals in retirement
Contributions to a 401(k) plan at work qualify as above-the-line deductions. That means you can deduct those contributions on your taxes even if you don’t itemize.
Both 401(k) plans and IRAs are designed to be used for retirement, which is why the taxes you pay are deferred (and why these accounts are typically called tax-deferred accounts). As such, early withdrawals from 401(k) plans are discouraged and you may trigger taxes and a penalty when taking money from these plans prior to age 59½.
Here are the most important things to know about withdrawing money from 401(k) plans or traditional and Roth IRAs:
• Withdrawals from 401(k) and traditional IRA accounts are subject to ordinary income tax at the time you withdraw them. If you withdraw funds before age 59½, you would owe taxes and a 10% penalty — although some exceptions apply (e.g. an emergency or hardship withdrawal).
• Roth IRA contributions and earnings are treated somewhat differently. Withdrawals of original contributions (not earnings) to a Roth IRA can be made tax- and penalty-free at any time.
• If you withdraw earnings from a Roth account prior to age 59½, and if you haven’t owned the account for at least five years, the money could be subject to taxes and a 10% penalty. This is called the five-year rule. Special exceptions may apply for a first-time home purchase, college expenses, and other situations.
• After age 59½, thought, qualified withdrawals from a Roth IRA are 100% tax-free.
A 10% early withdrawal penalty can apply to withdrawals made from 401(k) plans or IRAs before age 59½ unless an exception applies. But the IRS does allow for several exceptions. In terms of what constitutes an exception, the IRS waives the penalty in these scenarios:
• Permissive withdrawals from a plan with automatic enrollment features.
• Corrective distributions.
• Death of the plan participant or IRA owner.
• Total and permanent disability of the plan participant or owner.
• Payments made under a Qualified Domestic Relations Order (QDRO) — usually during a divorce.
• Payment for qualified higher education expenses (helpful to know when saving for your child’s college tuition).
• Dividend pass through from an ESOP.
• Withdrawals of up to $10,000 toward the purchase of a first home.
• Payment of unreimbursed medical expenses.
• Certain distributions to military members.
• Returned distributions.
You might also avoid the penalty with 401(k) plans if you meet the rule of 55. This rule allows you to withdraw money from a 401(k) penalty-free if you leave your job in the year you turn 55, although you would still owe ordinary income taxes on that money. This scenario also has some restrictions, so you may want to discuss it with your plan administrator or a financial advisor.
Required Minimum Distributions (RMDs)
Required minimum distributions or RMDs are minimum amounts you’re required to withdraw from 401(k) plans and traditional IRAs. These rules apply to:
• Traditional IRAs
• SEP and SIMPLE IRAs
• 401(k) plans
• 403b plans
• 457b plans
• Profit-sharing plans
• Other defined contribution plans
The IRS generally requires you to begin taking RMDs from these plans at age 72 (or age 70½, if you turned 70 before July 1, 2019). The amount you’re required to withdraw is based on your account balance and life expectancy, and many retirement plan providers offer help calculating the exact amount of your required distributions.
This is critical, because if you don’t take RMDs on time you may trigger a 50% tax penalty. This tax applies to the amount you were required to withdraw.
If your employer doesn’t offer a 401(k) plan, you may want to set up an IRA, either traditional or Roth depending on your personal financial situation. And if you’re already contributing to a 401(k), you may still want to think about opening an IRA. Next, a discussion of the benefits of having both types of accounts in your retirement plan.
Benefits of Having Both a 401(k) and an IRA
Instead of investing in only an IRA or your company’s retirement plan, consider how you can blend the two into a powerful investment strategy. One reason this makes sense is that you can invest more for your retirement, with the additional savings and potential growth providing even more resources to fund your retirement dreams.
Since employers often match 401(k) contributions up to a certain percentage (e.g., your company might match the first 3% of your contributions), this supplement boosts your overall savings. The employer match is essentially free money that you could get simply by making the minimum contribution to your plan. Every company is different, so check with your employer to determine their policy on matching 401(k) contributions.
Now imagine adding an IRA to the picture. One of the best things about an IRA is the flexibility you have when investing. With a 401(k), you have limited options when it comes to investment funds. With an IRA, you’re able to decide what you’d like to invest in, whether it be stocks, bonds, mutual funds, ETFs, or other options.
By investing in both a 401(k) and IRA, you are taking advantage of employer-matched contributions and diversifying your retirement portfolio which can help manage risk and potentially improve the overall performance of your investments in aggregate.
That said, if you choose to invest in both types of accounts, it’s important to make sure your investment choices don’t overlap.
Should I Have Both a 401(k) and an IRA?
Can you have a 401(k) and IRA is a good question to ask. But it’s also important to consider whether it makes sense for your financial plan. Whether you can deduct contributions to a traditional IRA or save in a Roth IRA can also make a difference in deciding where to save for retirement.
Yes, if you can max out both accounts
Here’s a simple question to ask yourself: Can I contribute to 401(k) and IRA plans up to the annual limits, based on my income and spending? If so, this can go a long way in funding your dreams for retirement.
This assumes, of course, that you can realistically afford to contribute $20,500 to a 401(k) each year (or more if you’re 50 or older) along with up to $6,000 to an IRA. If you’re trying to pay down debt, save for your child’s college expenses, or reach other financial goals, then fully funding multiple retirement accounts may not be realistic.
If you are planning to contribute the maximum to both a traditional IRA and a 401(k), consider your budget and spending. And you’ll need to do some research into how that may affect your retirement tax deductions.
If you can’t max out both accounts, maybe
Not everybody is able to max out both retirement fund options, but even if you can’t, you can still create a powerful one-two punch by making strategic choices. So, first, think about your company-matching benefit for your 401(k). This is a key benefit (especially since these matching funds don’t count toward what you can personally contribute), and it makes sense to take as much advantage as you can.
So, let’s say that your company will match a certain percentage (say, 3%) of the first 6% of your gross earnings. Calculate what 6% is and consider contributing that much to your 401(k) and opening an IRA with other money you can invest this year.
And, if you end up having even more money to invest? Consider going back to your 401(k), because all you’ve done with this strategy is to contribute what could be matched. There still may be value in contributing to your 401(k) beyond the amount that can be matched — for the simple reason that company-sponsored plans allow you to save more than an IRA does.
Now, let’s say you have a 401(k) plan but your employer doesn’t offer a matching benefit. Then, consider contributing to an IRA first. You may benefit from having a wider array of investment choices. Once you’ve maxed out what you can contribute to your IRA, then contribute to your 401(k).
There’s No ‘One-Size-Fits-All’ Answer
The guidelines we’ve provided should help you to start creating your own unique retirement plan. But the reality is a retirement plan that might work for one person may not be right for the next. You need a personalized plan with just the right diversified portfolio. Items that you should consider when refining your retirement plan include:
• Your current income
• Anticipated future earning potential
• Your current expenses
• Anticipated future expenses (perhaps college for your children)
• Your risk tolerance
• Your timeframe
To take this information and craft it into a strategic plan, consider consulting a financial advisor.
Not only is it possible to have a 401(k) and also fund a traditional or Roth IRA, it might offer you tremendous benefits, depending on your circumstances. The chief upside, of course, is that having two accounts gives you the option to save even more for retirement — which is a smart idea for most of us (given the statistics indicating that many people aren’t saving enough).
The chief downside of deciding whether to fund a 401(k) and a traditional or Roth IRA is that it’s a pretty complicated question: You have to consider your ability to save, and the tax implications of each type of account, as well as your long-term goals. Then it’s an easy next step to open a SoFi IRA. SoFi doesn’t charge any management fees, and we can help you take a look at your current 401(k) plans to see what you are getting charged. We can also help you rollover your 401(k) into an IRA with SoFi when you’re ready.
When you’re ready to take control of your retirement savings, SoFi will be here to help. See how a SoFi Invest account can help you reach your financial goals.
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