A common misconception about IRAs – if you have a 401k at work, you can’t open an IRA. It’s false. You can contribute to an IRA and a 401k at the same time!
Let’s take a closer look at investing in both an IRA and a 401k at the same time.
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 $122,000 to $137,000 ($193,000 to $203,000 for married) for 2019, unless you use a Backdoor Roth IRA [1]. See the Roth 401k and Roth IRA Limits [2] 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.
- Contribute the minimum to the 401k to get the full match.
- Contribute to a Roth IRA until you hit the income limits.
- Contribute any additional IRA contributions to a traditional IRA, with plans to make a Roth IRA conversion [3].
- Max out the rest of the 401k.
- 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 [4] if you are eligible!
Deadline to Open an IRA
The deadline to open an IRA each year is the tax deadline [5] in the following year. It’s also the last day to contribute to an IRA for the prior tax year.