If you have a 401k at work can you open an IRA? Find out if you can contribute to an IRA and a 401k at the same time!

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.

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

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. 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

The deadline to open an IRA each year is the tax deadline in the following year. It’s also the last day to contribute to an IRA for the prior tax year.

More on 401ks and IRAs

There is a lot of confusion surrounding the eligibility of contributing to a retirement account. I covered the topics of contributing to an IRA as a teenager and while you are in college.

But what about if you are unemployed? Can you still contribute to a retirement account if you don’t have a job? As with anything related to the tax code, the answer is yes…and no.

contribute to a retirement account

Can You Contribute to a Retirement Account If You Don’t Have a Job?

Can You Contribute to a 401k Without a Job?

No. When it comes to contributing to a 401k plan when you don’t have a job, the answer is no. First of all, an employer needs to sponsor the plan. Therefore, if you don’t currently have a 401k, you cannot open one. That is unless of course you are an employer yourself. But if this were the case, then you would be employed and you would be eligible for a Solo 401k.

But let’s look at a more common situation. You have a 401k at an old employer and you want to contribute to it. Unfortunately, you cannot contribute to the plan since you don’t have a job. In most cases, the old employer won’t let you invest in the 401k plan even if you did have a job. This is one of the reasons why it makes sense to roll over your old 401k plans to either an IRA or your current employer’s 401k plan, if they allow for rollovers.

Can You Contribute to an IRA If You Don’t Have a Job?

Maybe. You have to give it to the tax code because you can contribute to a Traditional or Roth IRA without a job. But you might not be able to either. Sorry, I don’t make up the rules. Let’s first tackle the possibility of contributing to an IRA without a job.

In order to contribute to an IRA in a given year, you need to have earned income. Earned income is income earned from a job, net earnings from self-employment, long term disability benefits and union strike benefits. Interest, dividends, child support, alimony, Social Security benefits, pension income, unemployment benefits and capital gains are not considered earned income and are therefore not eligible.

So let’s say you have earned income earlier this year but you are currently unemployed. The IRA limits state you can contribute 100% or $5,500 whichever is less, in 2013 to a Traditional or Roth IRA. If you earned $2,000 this year, then you can contribute all $2,000 to an IRA, regardless if you are currently employed or not. The key here is that you earned the income in 2013.

If for example, you earned $10,000 this year, the most you can contribute is $5,500. This then takes us to when you cannot contribute to an IRA. Luckily, it is fairly straightforward. If you have no earned income for the year, then you cannot contribute to an IRA this year.

Trouble happens when you enter the next year and have earned income. Let’s look at this situation. Assume you did not work in 2013 and therefore have no earned income. When contributing to an IRA you can contribute to an IRA for 2013 from January 1, 2013 through April 15, 2014. Many people make the mistake of making a 2013 contribution thinking they can use the money they made in the beginning of 2014. This is not the case. You can only contribute to an IRA if you had income for that taxable year, January 1 through December 31.

Spousal IRA

Even with all of that said, there is still one more exception. Again, I apologize, I don’t make the rules. If your filing status is married and file jointly, your spouse can make IRA contributions for both himself or herself and his or her spouse even if the spouse does not work. To qualify the spouse that is making the contribution has to have earned enough income to cover both contributions. This means that if your spouse makes the maximum contribution for both of you, $5,500 then they need to have earned income of at least $11,000 for that year.

Final Thoughts

As I mentioned, when it comes to taxes, there are rules and then there are exceptions to those rules. Unfortunately, many times there are exceptions to those exceptions as well! In a quick summary as to whether or not you can contribute to a retirement account, assuming you are unemployed you:

  • Cannot contribute to a 401k plan regardless.
  • Can contribute to a Traditional/Roth IRA if you had earned income for the given year.
  • Cannot contribute to a Traditional/Roth IRA if you did not have earned income for the given year.
  • Can contribute to a Traditional/Roth IRA regardless if you have earned income if you are married filing jointly and your spouse makes a contribution on your behalf.

I hope this clears up this issue for you. If you have any questions, just ask!

More Tax Questions

These days switching companies, and even industries, a number of times throughout one’s career is the norm. In the process, your retirement funds may turn into a jumble of old 401k’s that you haven’t gotten around to organizing.

What to Do With Old 401k Plans

After leaving an old job, you can:

  • Leave your 401k with the old plan provider if they allow it.
  • Take a distribution in cash (please don’t do this!)
  • Rollover your 401k to an IRA.
  • Rollover your 401k to your new employer’s plan.

Roll Over Your 401k to an IRA

Making a rollover to an IRA can be the right decision if you will have a better selection of funds and lower fees than the options in the 401k.

Rolling over your 401k into an IRA can simplify your finances and help you gain better control over your investments and it may not be as much of a hassle as you think.

Here is how to handle your 401k rollover to an IRA. We’ll also talk about rolling over your 401k to a new employer’s plan in a future article.

401k Rollover to IRA Options

There are two ways to complete a rollover from your 401k to your IRA, including a rollover of a distribution and a direct rollover.

Rollover your distribution check. If you receive a distribution from your 401k you have 60 days to complete a traditional rollover of those funds into your IRA. Your 401k plan administrator will usually withhold 20 percent of the amount of your distribution for income tax purposes.

Make a direct rollover. You may request your 401k plan administrator to roll your distribution directly into your IRA. In this situation the plan administrator is not required to withhold taxes from the distribution, since you never actually take possession of the funds.

How to Roll Over Your 401k to an IRA

  1. Open an IRA. If you don’t have an IRA, you’ll need open an account to receive the rollover funds. Many of the online discount brokers offer no fee IRAs. You can also pick up a sign up bonus while rolling over your IRA. For example, ETrade currently offers a $200-$600 rollover bonus.
  2. Contact your 401k Provider. Your HR Department should be able to help you contact your 401k provider. When you call the provider, tell them you’ve left your job (they should have a record of this) and want to move your funds to an IRA. They will point you to the forms you need for your rollover (also available online) and initiate the process of disbursing your funds.
  3. The Funds. In 1-2 weeks, the brokerage will either send you or the new brokerage a check made out to “Brokerage FBO Your Name.” If they send it to you, immediately forward it to the brokerage with your completed forms. If they send it straight to the brokerage, you’ll only need to submit your forms.
  4. Follow Up! After another week, you should call the new provider to ensure they’ve received your info and find out any how to access your account.

Tax Withholding on the Rollover

You will need to rollover the entire distribution to avoid income taxes on the distribution. This means if your 401k plan administrator withheld 20 percent of your distribution for taxes, you will have to come up with an equal amount to contribute to your IRA or that amount will be subject to early distribution tax penalties.

Other Things to Consider

Be Patient. Make sure you wait until the contribution from your last paycheck at your old employer settles (about a week).

Roth or Traditional? After evaluating your tax situation, you’ll want to decide whether to move your funds to a Roth or Traditional IRA, which will determine which form you need.

Existing Brokerage. If your 401k and IRA are with the same brokerage, the rollover 401k to IRA process may be even easier. You’ll likely only have to submit the proper forms. The brokerage should be able to transfer funds into your IRA (new or existing) without cutting a check.

Fund Minimums. Some brokerages have fund minimums. This can work to your advantage if you have enough in a 401k to get into a fund you wouldn’t otherwise have access to. However, if your balance is small, you may have to start in a smaller fund.

Market Prices. You can’t control what date (and therefore, prices) your investments are sold/purchased on and your money will be out of the market during the rollover. It’s not a big deal, but just something to keep in mind during your transfer.

More on 401ks and IRAs

Back in January of 2012, I wrote an article on the upcoming fee disclosure rules for 401k accounts. Plan providers were now being required to display how much in fees the employees were paying with their current 401k plan. This is an issue because up until the rule change, providers could essentially charge anything they wanted and never had to disclose it. While you would think that they could not charge too much because people would run, that is not the case with 401k plans.

courtesy of tax credits

Photo Courtesy: Tax credits

401k Fee Disclosure

The reasons for this are two-fold. First, those fees were never shown to employees. The fee was built into the offered funds returns. Think about this: how many times have you heard someone tell you that their 401k plan stinks? The market returns 12% and their funds only return 7%? While not all of the difference is because a high plan fees, a portion of it is. For all you know, you could be paying 3-5% in fees without knowing it. Trust me, I’ve broken out the fees before for some 401k plans and didn’t believe how high the fees were myself. I thought I made a math error. Unfortunately I didn’t.

The second issue a 401k plan isn’t changed is because of the time it takes to change a plan. If Joe employee isn’t happy and complains, the employer isn’t going to change the plan. After all, one employee out of hundreds or thousands isn’t enough to make the employee research alternative plans, interview them, schedule presentations, pick the new provider and then work with them to transition the employees over and deal with any issues.

New Regulation

The new law went into effect this past summer and employees received their first disclosures about the new law and what to expect. Now employees are getting their new 401k statements that itemize the fees that are deducted from their plans. What investors will find will be disappointing. The reason for this is because many 401k plans took the easy road. They didn’t spell out “you paid X% in fees”, but instead displayed a range of fees, as in “your expenses range from X% to X%”.  This leaves employees and employers questioning what exactly they pay in fees.

On top of this, there is no average fee listed. This is important because if I told you that your expenses were 0.50% you are either thrilled because that appears to be a low number, or you are clueless because you have no idea how that ranks compared to other plans.

Now, in defense of the 401k plans, they did follow what the law called for. The law said nothing about providing an average as I mentioned above. And to further defend them, doing so would be hard because of all of the variables that are involved with coming up with such a fee: plan size, number of participants, type of investments, etc.

Future Regulation

As disappointed as I am with how the new law turned out, I am hoping that regulators learn from these short-comings and revise the law to strengthen it. They should require a specific number on how much of a fee was paid as opposed to a range of fees. I would also like to see an average so employees and employers have an idea of what they pay compares to their peers. However, I do admit doing this would be difficult.

What are your thoughts on the new 401k plan disclosures? Do you think they are helpful at all? Do you care if expenses are broken out?

More on 401k Plans

It’s a new year, so that means most people will be making an annual list of resolutions. These typically range from paying off debt to saving more, losing weight and building better relationships. Pretty much anything you want to change can be included as a resolution for the new year.

There is only one problem with these resolutions: we typically fail at them. It’s not from trying. We all start out of the gate strong, determined to meet that goal. But somewhere along the way, we lose sight of it or get distracted by life and we slip up momentarily. Some of us are able to right the ship, but for many others, that first slip up is an indication of a steep slope up ahead.

courtesy of ahisgett

Photo courtesy ahisgett

To help you keep momentum and motivation high, I list a few quick and easy financial goals for you to complete. All of them will only take you 10 minutes of your time but will pay big dividends in the long run. So without further ado….

Increase Your 401k Withholding

Simply walk down to your human resources department or email them for the form to increase the amount that is taken out of your paycheck each pay period and goes into your 401(k) or Roth 401k. I’m not asking you to get crazy with the new withholding amount, in fact I am only asking you to raise it 1%. That’s it. If you were withholding 5% increase it to 6%. Of course if you want to increase it more, I am not going to stop you.

Because your 401(k) contribution is taken out of your paycheck before taxes, your paycheck actually decreases by less than the amount you took out. Here is an example for better understanding. Let’s say you earn $25,000 per year and are in the 25% tax bracket. If you contribute 3% of your bi-weekly pay to your 401(k) that comes to $29. So, each paycheck you receive, $29 is taken out and placed into your 401(k). But, your paycheck is only reduced by $22 each time. This is because you aren’t taxed on your 401(k) contribution so it “looks” like you are earning less than you are to the IRS.

If you received any sort of a raise for the year, you will not even notice this extra 1% being removed from your paycheck. And I’ll bet that even if you didn’t receive a raise, you could still increase your withholding 1% and not notice it. Give it a try for a few weeks. You’ll be surprised. If you don’t think increasing your contribution by 1% matters, read my previous post on how much increasing your savings by 1% changes your finances.

Review Your 401(k) Fees

While you are at the human resources department, or within the same email you send them, ask for the enrollment booklet they provided to you when you first started. In the booklet will be a fact sheet for each mutual fund you can invest in that is in your 401(k) plan. Identify the funds you are currently in and note the expense ratio of them. If any of them are high – 1% or more, consider looking at dumping them for other low cost funds in your plan. Unfortunately for many of you, this will not be as easy as it sounds. Most of you are tied to a few funds and most probably have high expense ratios. My suggestion is to look at all of the fund choices and strike out any that have expenses over 1%. Hopefully there are a few funds left. In the worst case scenario, you should hopefully have left on the list of possible investments a bond fund and a large cap fund. Pick these two funds and invest 60% in the large cap fund and 40% in the bond fund (unless the risk questionnaire you completed says otherwise). That’s it. You don’t need to invest in all of the choices. You can use your Roth IRA and taxable account to round out your diversification (yes, you can have a 401k and an IRA at the same time).

Paying attention to fund fees is one of the things that you can control when you invest in the stock market. While it doesn’t seem like investing in a fund that charges 1.25% would cost you that much more than an equivalent fund that charges 0.25%, it does. Refer back to the link above about saving 1% more each year. The difference in saving 1% each year is the same as paying 1% more each year. It adds up to a lot of money over time. And don’t listen to those that try to tell you a fund that charges a higher fee is a better fund or will return more over time. It won’t. It just means you’ll be paying more for it.

Final Thoughts

These are two quick and easy steps you can take in the new year to increase your motivation for meeting the rest of your new year’s resolutions. Again, they will only take you about 10 minutes each, less if you can access your 401(k) online, and will better your future financial state of affairs. Don’t dismiss how big of an impact increasing your withholding 1% per year or paying 1% less in expenses has on your portfolio 10, 30 or 30 years into the future. Little amounts add up over time. Take advantage of this time by saving as much as you can and by paying as little as you can in fees.

Lastly, here is a bonus tip to save you time come next year: when you are increasing your withholding by 1%, see if you can set it up so that come January of each year, you increase your withholding by 1%. This way you never have to think about it or remind yourself to do it. You will always be saving more each year which means your money can compound upon itself even more each year. Before long you’ll reach the 401k limits. If you can’t set this up automatically, then just set an Outlook reminder at the start of each year so you know to increase your withholding another 1% come the new year.

Do you have any additional easy retirement or financial goals for others?

More Retirement Planning Topics

My husband and I have been married for two and a half years now. We’ve gotten a kitten together, honeymooned together, rearranged furniture and painted more rooms than I care to mention. But something that we have not managed to do together is to change our beneficiaries on our joint and individual financial accounts.

To be honest, for as much as I love finances, I have never been eager to name beneficiaries. I get an account set up (most likely because of a promotion where I receive money for funding something), set up automatic withdrawals into it, and forget about it. The account is front of mind for me every few months when I calculate our net worth, but for the rest of the time it sits working for us. Several times over the last five years I have wondered which accounts have designated beneficiaries, which do not, and more importantly, what this could mean for our money if one of us passed away. What happens if there is no beneficiary? Who would our money go to? I’ve set out to not only find the answer to what would happen in the event that a beneficiary is not named, but also to take care of this important financial detail in our household for our following financial accounts: checking, savings, Roth IRAs, a pension, death benefits from our companies and an investment account.

What Happens if We Don’t Name a Beneficiary to Each of Our Accounts?

  • Our Roth IRAs: Under Vanguard’s Custodial Account Agreement, if we do not name beneficiaries then our money will first go to our spouse if we are married and second to our estate if we are not married. So it looks like without designating a beneficiary, my husband’s Roth IRA money would come to me, and my IRA money would go to him.
  • Our Investment Account: We have an investment account with Sharebuilder and they do not currently offer beneficiary designations. Upon an account owner’s death, they will send out an estate packet and then pay to the executor of the estate.
  • Our 401(K): Under the federal Employee Retirement Income Security Act (ERISA), spouses are given the primary rights to a deceased spouse’s 401(K), unless they have signed a document to waive their right. Even if you fill out a beneficiary form with someone other than your spouse, if you remain married then a court will overrule this and give it to your spouse (without the waiver). If you are single, then you must fill out a beneficiary form for your 401(K) to determine who will inherit your account. If there is no spouse and no beneficiary named (or the beneficiary is deceased), then the money will be awarded to the estate and distributed according to the deceased person’s will.
  • Pension: I had to first call my pension fund and find out if it provides death benefits to my beneficiaries or if it terminates its obligations upon my death. It turns out that my pension does not terminate upon my death. The representative told me that if I do not name a beneficiary, the money will go to my estate.
  • Our Savings Accounts: After speaking with a representative at ING DIRECT, I found out that they do not offer beneficiary designations on their savings accounts. A check is made payable to the estate in the event of death.
  • Our Checking Account: My husband and I have a joint account, so I had assumed that all of the funds would be immediately available (as they always are) to either of us in the event of a spouse’s death. However, I found that in our state of Texas there is no automatic Right of Survivorship on joint checking accounts. In the event of no Right of Survivorship on a joint account, a court must determine what the surviving spouse contributed to the account and then the surviving spouse would be given access to that. The rest of the funds would be given to the deceased’s estate. This could be a huge headache for one of us should the awful happen because most likely our checking account would be frozen until a court decided what percentage we could have access to. What about all of our automatic payment of bills that are set up and the paychecks that are automatically deposited? How would one of us continue to pay bills until the account was unfrozen?
  • Basic Life Insurance Policies: Without a named beneficiary, proceeds from my life insurance policy would go to my estate.

What Types of Beneficiaries Can We Choose?

I learned that you can name your spouse, children, grandchildren, or any individual as a beneficiary. But you don’t need to name an actual person as the beneficiary; you can also designate a trust, a charitable organization or other organizations, or an estate as the beneficiary.

It also should be noted that a primary, secondary, and different numbers of people/organizations can be named and given a percentage of the money. A secondary or contingent beneficiary should be chosen in the event that the primary beneficiary is deceased, or refuses the inheritance. In the event that a secondary/contingent beneficiary is not chosen, the money would pass to your estate.

Our Action Plan

Based on this research, it looks like Paul and I need to do the following:

  • Designate Beneficiaries for the Following Accounts: The pension, my Basic Life Insurance policy, both of our Roth IRAs, JP Morgan Chase Checking Account (held jointly, but there is no right of survivorship in Texas where we live), and Paul’s Basic Life Insurance policy. (Check!)
  • Determine Our Contingent Beneficiaries: We need to sit down and figure out who our contingent beneficiaries would be in the event that we both become deceased at the same time (either untimely, or timely). (Still need to do).
  • Learn about Estates: It looks like we need to learn about estates, how they fit into beneficiaries, wills, and trusts. (Still need to do).
  • Sign our Checking Account up as a Right of Survivorship: (Check!).

When We Should Next Review Beneficiary Designations

Changes in life necessitate reevaluating the beneficiaries we have named. We should next review our beneficiaries if we have a change of heart, if we set up a will or a trust, if there is a birth, divorce/remarriages, death, or if we open new financial accounts.

Also, if you are single and get married, you also need to review your beneficiaries (and hopefully before two and a half years into the marriage!).

Is your estate planned? Do you have a will? What do you suggest we tackle next?

More on Estate Planning

In Roth IRA Conversion Rules Highlighted Russ commented that his employer is starting a Roth 401k plan.

The Roth 401k plans are relatively new and many people haven’t heard of them yet. Employers are slowly starting to offer them to employees.

Let’s explore how the Roth 401k works, the benefits over the Roth IRA, and why it is taking time for employers to offer them!


What is a Roth 401k?

The Roth 401k is a great retirement savings vehicle with many of the same benefits as a Roth IRA including:

  • Tax free growth.
  • Ideal for investors currently in a low tax bracket, but anticipate being in a higher tax bracket in retirement. This is the case for many younger workers.
  • Offers the ability to diversify accounts against tax treatment using a combination of regular 401k and Roth 401k. A great idea because of the uncertainty of taxes in the future.

In addition, for those who are interested but restricted from participating in a Roth IRA, the Roth 401k makes sense. Additional benefits over the IRA include:

As always, there are other points to consider including the investment options and expenses of the investments when deciding whether or not to participate in a Roth 401k.

Why Employers are Slow to Implement

The Roth 401k didn’t have a lot of employers that immediately put it into place because the original legislation made it only a temporary plan existing from 2006-2010. That changed in 2006 when the Pension Protection Act was signed making the Roth 401k permanent. Employers may still be reluctant because they have to account for the following:

  • Keeping the highly paid employees contributions in line with the others to keep the plan qualified.
  • Additional education needed to help employees make the right choice between the traditional pre-tax option and the new after-tax option.
  • And of course the plan sponsor would charge additional fees.

Other Roth 401k Tidbits

  • Employer matching funds will still be deposited into the pre-tax 401k account.
  • Further advantages for proprietors of owner-only businesses are detailed in an old article from Investment Advisor.

Ask Your Employer to Offer a Roth Option

If your employer doesn’t offer a Roth option in your 401k, ask for it. At my old job, I campaigned for access to the Roth 401k. I emailed my HR department numerous times and encouraged other coworkers to do the same. We eventually got the option for a Roth 401k (It probably had nothing to do with our emails, but it is fun to think it did!)

If your company doesn’t offer a Roth 401k there are strategies that you can use to get extra money into a Roth IRA.

And don’t forget, if you have both, you can contibute to a Roth 401k and a Roth IRA at the same time.

Roth 401k Q&A

Here are some questions I received about the Roth 401k from a reader, Julie:

If I switch to the Roth 401k versus the regular 401k will my income reported on my tax statements be higher for the year?

Yes, it will. The Roth 401k uses contributions with after-tax money. Therefore your income will be higher on your W-2 (Wage and Tax Statement) than it was using a regular 401k.

If so, it’s even harder to qualify for the Roth IRA, correct?

Yes. If you were nearing the income phaseouts and limits for the Roth IRA, contributing to the Roth 401k could make you ineligible to contribute to the Roth IRA. However, the contribution limits are higher for a Roth 401k, so depending how close you are you could come out ahead. In addition, you could implement a strategy using a combination of the traditional and Roth 401k to keep your eligibility.

How do you figure out if it’s worth it or not to switch?

Dinkytown offers a great calculator to help determine which option is better. Of course the calculator does not take into account other considerations that may impact the decision.

Can you have a Roth 401k and a Roth IRA at the same time?

You sure can. Here are details on contributing to a Roth 401k and a Roth IRA at the same time.

For a deeper look at the pros and cons of a Roth 401k see To Roth 401k or Not to Roth 401k?

More Roth Topics