A few people that I’ve talked to recently thought that because they had a 401k at work, they couldn’t open an IRA. Not true! Let’s take a closer look at investing in both an IRA and a 401k at the same time.

Since the tax deadline (which is also the last day to contribute to an IRA for last year) is just days away, you’ll have to act quickly if you want to start a new IRA and maximize your contribution.

Can You Have a 401k and an IRA at the Same Time?

Yes, you can invest in both an IRA and a 401k (or a Roth 401k and a Roth IRA) at the same time, or any combination of those accounts.

And in some cases, based on the fees in your 401k, an IRA might actually be a better place to invest your money.

Limits on 401k and IRA Contributions

If you want to contribute to both a 401k and an IRA in the same year, the contribution limits are based on your income.

Traditional IRA contributions do not have income limits, but the income limits for a Roth IRA phases out for single filers between $116,000 to $131,000 ($183,000 to $193,000 for married) for 2015, unless you use a Backdoor Roth IRA. See the Roth 401k and Roth IRA Limits for all the contribution limits for 401ks and IRAs.

Which Order to Fund the Accounts

Ideally, you’d want to maximize contributions to both your 401k and your IRA. However, if you aren’t saving the full amount, you’ll have to determine which account is better for your money.

Here’s the strategy that I’ve always used when funding retirement accounts.

  1. Contribute the minimum to the 401k to get the full match.
  2. Contribute to a Roth IRA until you hit the income limits.
  3. Contribute any additional IRA contributions to a traditional IRA, with plans to make a Roth IRA conversion.
  4. Max out the rest of the 401k.
  5. Finally, save the rest in a taxable account.

Don’t forget to report your contributions on your taxes, and take the Saver’s Credit for Retirement Contributions if you are eligible!

Deadline to Open an IRA

If you haven’t started an IRA, you have three more days to start one! I helped a client open a small IRA this morning at Scottrade which took less than 10 minutes.






You can get my latest articles full of valuable tips and other information delivered directly to your email for free simply by entering your email address below. Your address will never be sold or used for spam and you can unsubscribe at any time.

Email:

Comments to Can You Have a 401k and an IRA at the Same Time?

  1. Why do yuo have only three days left to contribute to Roth IRA?

    FashionWithoutGuilt.com

    • You only had three days to contribute to an IRA for 2009. After that, all deposits count towards 2010.

      Eric

      • Thank you so much Eric for responding back to me about the 401k and Roth IRA contribution days? With someone being 25 about to start her 401k and wanting to open a Ira what is some advice that you would give? Because I am not sure if I should open a traditional and then transition to a Roth IRA?

        Fashion Without Guilt


    • Hi Fashion -

      I would start the 401(k), especially if there is a company matching contribution. Since it is pre-tax, it lowers your taxable income. A $100 contribution should only reduce the paycheck by about $80.

      If you are putting money into a 401(k), and still want to do something on your own, then start a Roth. The Roth is a better compliment to the 401(k) plan, since it does the opposite. There is no tax benefit now – BUT NO TAXES on money taken out at retirement.

      This is also in my book, “Help! My 401(k) Has Fallen – And Must Get Up!” You can contact me at the website for more information and also get a FREE REPORT “The 5 Biggest Problems With 401(k)s – And How To Fix Them”.

      Dean Voelker

      • Thank you so much Dean. I am going to start my 401k next week. But everyone says start a 401k but how do you understand the stocks and where you money is going? How did you find out yourself? Did you read books or just feel your way through?

        Fashion Without Guilt


    • Hi Fashion,

      If I were in your position I would put my first investment dollars into my 401k if there is a match. Put the total amount necessary to get the full match.

      My next investment dollars would go into a ROTH IRA. You do not get the tax advantage savings today, but 40 years from now when our tax rates are near 70% you will be happy. :) The ROTH IRA allows you to make after-tax investments and later in life you can pull the money out without paying taxes on anything.

      Hope that helps!

      Eric

      • Thank you again Eric for your response. But once you started your 401k how did you understand the stocks and how the market is doing and what is happening with you money? Where did you learn from?

        Fashion Without Guilt


      • It comes with time, and reading things like this blog. :)

        The best advice for now would be to spread your investments over three or four stock-based mutual funds. Go for growth funds if you can. As you learn more you will find your style.

        Whatever you do, DONT PANIC when the market goes down. It will come back. And if you pulled out, you will miss the gains.

        My advice, dont watch the market everyday.

        Eric


  2. Good article. You can indeed have a 401(k) and IRA at the same time. It’s good that you listed the income limits also for contributions to a Roth.

    To answer “Fashions” question above – you can contribute to a Roth at anytime, however April 15 is the last day to make contributions that may be credited for 2009. Any Roth or Traditional IRA contributions AFTER April 15 will go towards 2010.

    Dean Voelker

  3. I will have three days start IRA.

    wholesale shoes

  4. I agree 100% with the order you outlined for investing in retirement accounts.

    That being said, I often find myself recommending to friends that are “less passionate” about personal finance to max put as much in their 401ks as possible. I think it is easy for us that are very passionate about this topic to forget that a lot of people are not. In fact, many despise money subjects. So the easier it is and the less they have to think about it, the better.

    At the end of the day, if you invest 15-20% for a solid 40 years, you should be doing alright. :)

    Have a great weekend!

    Eric

  5. Madison, can you clarify this a bit. You mean Roth IRA and 401K, not Traditional IRA and 401K. You can’t contribute to both of those at the same time, right?

    PT

    • PT, Actually it’s ok for either the Roth or traditional. You can have any combination of all four if you want.

      To answer your specific question, you can contribute to both a traditional IRA and a 401k at the same time. (You may not be able to deduct the traditional IRA, but that’s a whole separate topic!)

      Madison

      • Good point. Yes, I was referring to the tax deduction. I don’t know why anyone would contribute to a Traditional IRA without getting the deduction. I think that’s why the question (about contributing to both) is often asked…b/c of the deduction issue.

        PT


  6. That is correct. You can contribute to a 401(k) and Traditional IRA. If you have a choice and you are putting in as much as you can for the 401(k) already, my choice would be the Roth. You would already be getting tax deferrment from the 401(k) so the Roth would be a better compliment. If gives you TAX-FREE growth and TAX-FREE withdrawals at retirement.

    Dean Voelker

    • Can I contribute to traditional IRA for 2010? I am W-2 employed, participated in 401(k) for 2010 but there’s no employer’s matching. I am married; filing joint. My spouse has no income for the year 2010. If yes – I can make contribution to traditional IRA for last year; can I get tax deduction? And, if yes – what are the limits? Can you please explain – that would be very helpful.

      Thanks! J

      Jack

  7. I am actually a financial advisor. It may be helpful to contact an advisor, although if you are just getting started, I’d stick with about 3 funds. You want ones that do different things – a large company fun which pays dividends, a medium sized company fund, and a small company fund or an international one.

    Dean Voelker

  8. have a question – hope its not too late. i dont have 401K at work. can i open traditional ira and also roth ira and contribute 5000 to each totaling 10,000? (assume i am within income limits and 2011 limits are same as 2010 which are 5000 in IRA)? please advise.

    Joshua

    • Joshua,

      You can contribute to both types if you chose to, but the grand total of both can total no more than 5,000 if you are younger than 50. Once you hit the ripe age of 50 you can contribute an additional 1,000 each year.
      If you don’t have a 401k with your work, I would suggest opening up a simple online brokerage account and investing the money that you would be putting into the 401k into it.

      Fred

  9. I had a 401K at work and was layed off at the end of March. If I fund a traditional IRA is the contribution tax decutible?

    Donna

    • Hi Donna,

      Yes, it is, However, the deposits will be slightly different. With your 401k the deposits are taken straight from your paycheck and your taxable income is reduced right there. For IRA contributions, you will make the deposit from your after-tax income, and then you get your money back during tax time.

      There are ways to reduce your withholdings to balance it out, but it is best to talk to a tax professional if you want to do that.

      Eric

  10. This article has been very helpful. I am interested in doing Step 3 specifically, but have concenrs. If I contributed $5k to the IRA and after the 60 day holdover period, it’s worth $5,500 (hypothetically speaking!) and I convert it to my Roth IRA, will my income for the tax year increase by $5.5k or $500? Inuitively, I would say only the $500 since you’ve already contributed $5k of after-tax money. Will my wirehouse distribution form delineate this at year end? If not, is there a box on the 1040 tax forms that delineates it?

    Emily

  11. I have a question that I don’t think was already covered by others.

    I am on W-2, have participated in 401(k) for 2010 but there’s no employer’s matching for my 401(k), just soleley did for tax deductions.

    I am married and under 50 & filing joint. My wife has no income. Can I contribute to IRA for 2010? And if yes, how much.

    Jack

  12. Why do you say “Traditional IRA contributions do not have income limits,”? Married filing jointly with AGI >= $109,000 cannot get any deduction. Then what’s the point of Traditional IRA?
    But i am looking for following information: i file jointly. income > 109,000. I want to invest in mutual funds and get tax benefits. I was thinking of opening Traditional IRA and investing and reinvesting MF returns back to same account. But looks like i won’t get benefits right? contribution $5000 is not deductible. Will I get tax benefits for reinvested dividends and capital gains?

    DC

    • Will Roth IRA work? Looks like i can invest 5000 in Roth IRA. Oh but those are not deductible also! Will i get tax-deferred benefits if i invest in mutual funds and reinvest the returns (dividends and capital gains)?

      DC

  13. Can you have a 401K and a Roth 401K or are you only able to have one of each ???

    scott johnson

  14. Many Questions….
    I am self employed S corporate thinking about open an 401k but undecided std. or Roth. I was told std. is better suited for me because of two things #1 I am in a higher tax bracket now then when I retired @2 “Tax deferral”. How ever the Roth will be tax free when I retired who cares what the tax rates are!! 2nd, I open an IRA for 2013 and rollover my “old” 401k from my previous employment, should I convert it over to Roth IRA? 3RD, should I give my self a raise W2 to benefit the 25% employer contribution with the 401K???? thanks a head of time
    Neil

    Neil Lim


Powered by sweet Captcha


Previous article: «
Next article: »

Barclaycard Arrival Plus $400+ Offer

The Barclaycard offer is for 40,000 miles, which you can redeem for a $400...

Close