Can you have a 401k and an IRA? 

See, a 401(k) and IRA (Individual Retirement Account) are two ways many save for retirement. Either of these has the potential to grow into a sizable nest egg.

So, if investing in one is good, how about investing in both? If you have earned income and meet eligibility requirements, you can diversify your portfolio and have multiple types of retirement accounts.

There are some things to be aware of, so let’s dive into the details of options for retirement savings.

401(k) VS IRA: What’s the Difference?

While both 401(k) plans and traditional IRAs are funded with pre-tax dollars on earned income, the two plans have quite a few differences. A 401(k) is a plan offered and administered through a private employer, while an individual opens an IRA through a financial institution.

IRAs and 401(k)s have contribution limits, and the 401(k) allows you to set aside more of your income. 

Both have a variety of funds available, but the 401(k) investment choices are limited by what your employer offers. An IRA is more flexible in its investments.

A traditional IRA has tax deduction limitations, and a Roth IRA has income limitations. (A Roth IRA has a few other differences, such as being funded with after-tax dollars.)

You can take loans from your 401(k) in certain circumstances, but you cannot take loans from either a Roth or traditional IRA.

401(k) Benefits and Drawbacks

A 401(k) plan is offered through an employer. For 2023, you can contribute up to $22,500 per year if you are younger than 50 and $30,000 per year if you are 50 or older. Often this contribution is a percentage of your salary.

Some employers offer a match on some of the contributions (typically a percentage). This is basically free money, so you should contribute at least the amount they match! 

A significant benefit of investing in a 401(k) is the contribution limits, which are three to four times higher than with an IRA. As contributions lower your taxable income for the current year, this is a distinct advantage over an IRA if you are trying to do some catch-up. 

401(k) plan investments are limited by what the employer offers. They might offer company stock or a few mutual funds. Some funds offer diversity based on your retirement age, and some are geared toward a specific market segment. You can choose an investment mix only from the funds offered.

If you leave your employer, your 401(k) may need to be rolled into an IRA or other retirement account, but some employers allow you to keep the account as is.

You can contribute and invest right in the 401(k) account as long as you are employed. Your employer has control over the choice of investment firms and has the discretion to switch firms, but your money will be transferred to the new account if they do so.

IRA Benefits and Drawbacks

An IRA offers more investment opportunities. You can buy stocks, bonds, mutual funds, ETFs, or other investments. This enables you to choose riskier or safer investments and diversify as much as you’d like. 

You are limited in how much you can contribute to an IRA. For 2023, the maximum contribution is either $6,500 per year if you are less than 50 years old or $7,500 per year if you are 50 or older.

Traditional IRA contributions are made with pre-tax dollars, so they will also lower your income for the current year. Remember, that a Roth IRA is different.

Traditional IRA Contribution Deductibility

Your salary (and whether you are also invested in a 401(k) plan) dictates how much you can deduct from your taxes for IRA contributions.

In 2023, you can partially deduct your contribution if you are covered by a workplace retirement plan and your salary is between $73,000 and $83,000.

If your salary is over $83,000, you can still contribute to a plan but cannot deduct your contributions from your taxes. 

If you are married and covered by a workplace retirement plan, you can partially deduct your contributions on your tax return if your joint salary is between $116,000 and $136,000. If your salary is above $136,000, you cannot deduct your contributions from your taxes.

If you are married and filing taxes separately, you can contribute to the IRA but cannot deduct any contributions from your taxes.

Roth IRA Contribution Limits

A Roth IRA is funded with after-tax income, with contribution and salary limitations. Like a traditional IRA, you must earn a salary of at least the amount you want to contribute.

The maximum amount you can contribute to any IRA (a Roth, traditional, or combination of the two) is $6,500 if you are under 50 and $7,500 if you are 50 or older. These can be in any combination but cannot exceed the contribution threshold. 

Furthermore, you can only contribute the full amount to a Roth if your salary as a single person is below $153,000. If you are a married couple filing jointly, the limit is $228,000. 

You cannot contribute to a Roth if your income exceeds these limits. You can, however, contribute to a traditional IRA and use the backdoor method to open a Roth. Talk to your financial advisor for more information.

So, can you have a 401k and an IRA?

As long as you meet the income requirements, you can contribute to both a 401(k) and an IRA. If your employer offers a match, you’d be remiss not to contribute at least the amount to qualify for the full match.

After that, you can contribute the entire amount you are eligible for according to your 401(k) plus any catch-up amounts if you are over 50. Since the IRA offers more investment opportunities, many choose to contribute to both to diversify their portfolio.

A financial advisor is the best person to explain how contributions will affect your taxes now and in retirement age. 

Check your eligibility

Your employer will let you know if they offer a 401(k) plan and when you are eligible to contribute. Not every employer will offer a 401(k) plan, and not every employer will match funds. Retirement plans are often part of a comprehensive benefits package offered by employers to entice you to work for them.

Some employers who match funds will have a vesting period for any dollars they contribute. You may forfeit the company match if you leave before the vesting period.

Anyone who earns income is eligible to contribute to an IRA. If you contribute to both funds but exceed the income thresholds, you can still contribute, but you cannot write the contributions off your taxes.

How Much Can I Put in a Traditional IRA if I Have a 401(k)?

Regardless of your income, in 2023, you can contribute the maximum amount of $6,500 per year if you are under 50 and $7,500 per year if you are 50 or over.

The IRA contribution can be split between a Roth IRA and a traditional IRA. If you pass the income thresholds, you can still contribute to an IRA and roll it over into a Roth IRA.

Retirement Plans and IRAs: FAQs

We listed the common frequently asked questions about IRAs and retirement plans:

Is my IRA contribution deductible on my tax return?

Whether your IRA contribution is deductible on your tax return depends on whether you are also contributing to a 401(k) plan. If you are not, then your entire contribution is tax-deductible. If you contribute to a 401(k) plan, your salary limits your IRA deductions.

Can I contribute to a traditional or Roth IRA if I’m covered by a retirement plan at work?

Yes, you can contribute the maximum allowed to the 401(k) and the maximum combined amount to a traditional or Roth IRA. The 401(k) and traditional IRA are funded with pre-tax dollars, and the Roth is funded with post-tax dollars.

Remember that the traditional IRA tax deductions may be limited if you also contribute to a 401(k) plan.

Can a qualified charitable distribution satisfy my required minimum distribution from an IRA?

When you reach age 72, the IRS requires you to take distributions from your IRA account. The minimum distribution varies per individual based on the IRA account balance. This money is then taxed as income. 

Instead of taking this money out for yourself, you can pay some or all of your minimum distribution to a qualified charity. You can tell your brokerage to transfer money directly to a charity.

While charitable contributions are usually tax-deductible, the money from your IRA you’ve donated is not; it is just excluded from your income. If you were going to donate money anyway, this is a way to lower your taxes.

The IRS does have some limitations on the types of charities, so ensure your chosen one qualifies.

Can I roll over my workplace retirement plan account into an IRA?

Once you leave your place of employment, you have three options. If your employer allows, you can leave the money in the existing account, roll it over to a new 401(k) plan at a different employer, or roll it into an IRA.

Your options depend on your old or new employer’s policies. You’ll want to pay attention to fees and investment options. 

If you decide to roll your funds to an IRA, you must transfer the money within 60 days of removing it from the 401(k). Otherwise, you face early withdrawal penalties and tax consequences.

Make sure you know all the rules of the IRA concerning minimum distributions, designating beneficiaries, and how often you can execute trades.

When money is moved from a 401(k) to an IRA, the 401(k) investments will be sold, and the money will be deposited into your new IRA account. Then you will work with your brokerage firm to invest the money in securities that align with your future financial goals.

An IRA has more investment options and will give you more control of your funds. On the other hand, an IRA will not allow you to borrow money from your account as a 401(k) will.

Can I deduct losses in my IRA on my income tax return?

An IRA is a combination of securities that may include stocks, bonds, mutual funds, or other securities. These securities are bought and sold on the stock market, which can be risky.

The amount of risk depends on the type of security – stocks are more volatile than bonds. That’s why financial advisors encourage you to consider risk based on the amount of time until retirement.

Additionally, higher-risk items tend to pay off (if the market is good), and lower-risk securities tend to have steadier growth (and losses are not as severe). 

If the market has a bad year, your IRA may decrease in value. If you have a longer period of time before retirement, there is a good chance you will recoup the losses before you make withdrawals. 

You are not taxed on anything until you withdraw the funds, but what happens if what you are withdrawing is less than what you put in?

Since 2018, there have been rules changes regarding writing off a loss. In short, the Tax Cuts and Jobs Act suspended certain deductions. Before that, the losses you could deduct were part of a formula based on your adjusted gross income.

Further, you were required to distribute the entire balance of all your IRAs (or Roth IRAs) to claim the deduction. 

Currently, the itemized deduction on your tax return is not allowed.

The Final Word

Planning for retirement involves more than depositing money into an account when you are young and hoping for the best. Markets can fluctuate, tax rules change, and your plans for the future can change.

If you don’t start planning now, you may be left relying on social security and savings, working until you are 90, or hoping for a lottery win. 

Through the power of savvy investing and patience, a 401(k) or IRA can grow into a sizable nest egg that allows you to spend your retirement years outside of a job. If you can, contributing to more than one retirement account can better prepare you for the future.

Retirement accounts can be confusing, so we invite you to explore more financial resources and tools within this website.