Can I Contribute to a 401(k) and an IRA?

Reviewed by: Chad Seegers, CRPC®
June 15, 2023

When it comes to retirement savings, many individuals wonder if they can have both a 401(k) and an Individual Retirement Account (IRA). The good news is that, in most cases, you can have both types of accounts simultaneously. A 401(k) is an employer-sponsored retirement plan, while an IRA is an individual retirement account that you can open independently. Both options offer distinct advantages and considerations, allowing you to maximize your retirement savings potential.

401(k) vs. IRA: Which Account is Better?

The choice between a 401(k) and an IRA depends on your individual needs and situation, as each option presents its own set of pros and cons. Starting with a 401(k), one of its primary advantages is the potential for employer matching contributions, where your employer contributes a certain percentage of your salary to your retirement account. This can significantly boost your savings over time. Additionally, 401(k)s typically have higher contribution limits compared to IRAs, allowing you to set aside a larger portion of your income for retirement. On the downside, 401(k)s often have a limited selection of investment options, and you have limited control over the investment decisions. Furthermore, if you switch jobs, you may need to roll your 401(k) over to an IRA or your new employer’s plan, which could involve fees and administrative hurdles.

On the other hand, IRAs offer greater flexibility and control over your investments. With an IRA, you have a wider range of investment choices, including stocks, bonds, mutual funds, and real estate. This allows you to tailor your portfolio to match your risk tolerance and investment goals. Additionally, IRAs provide the potential for tax advantages. Traditional IRAs offer tax-deferred growth, meaning your contributions are tax-deductible, and you only pay taxes when you withdraw the funds in retirement. Roth IRAs, on the other hand, offer tax-free growth, as contributions are made with after-tax dollars, and qualified withdrawals are tax-free. However, it’s important to note that IRAs have lower contribution limits compared to 401(k)s, and not everyone may be eligible to contribute to a Roth IRA based on their income.

How Much Can I Contribute to an IRA if I Have a 401(k)?

If you have a 401(k) through your employer, your ability to contribute to an IRA may be affected by certain factors such as your income level and tax filing status. The presence of a 401(k) does not restrict your eligibility to contribute to an IRA, but it can impact the tax deductibility of your IRA contributions. For individuals covered by a workplace retirement plan like a 401(k), the tax deduction for traditional IRA contributions may be limited or phased out based on their modified adjusted gross income (MAGI). In 2023, for single filers covered by a workplace retirement plan, the phase-out range begins at a MAGI of $73,000 and completely phases out at $83,000⁽¹⁾. For married couples filing jointly, where the contributing spouse is covered by a workplace retirement plan, the phase-out range starts at a MAGI of $116,000 and completely phases out at $136,000⁽¹⁾. However, it’s important to note that even if your contributions to a traditional IRA are not tax-deductible, you can still contribute to a Roth IRA as long as you meet the income requirements. The contribution limits for both traditional and Roth IRAs remain the same regardless of whether you have a 401(k) or not. As of 2023, individuals can contribute up to $6,500 to an IRA, with an additional catch-up contribution of $1,000 allowed for individuals aged 50 and older⁽²⁾. It’s advisable to consult with a financial advisor or tax professional to fully understand the contribution limits and tax implications based on your specific circumstances.

How Does Having a 401(k) Affect IRA Contributions?

Having a 401(k) can impact your IRA contributions in two main ways: eligibility and tax deductibility.

Eligibility: The presence of a 401(k) does not affect your eligibility to contribute to an IRA. Regardless of whether you have a 401(k) or not, you can still contribute to an IRA as long as you meet the requirements, such as having earned income. This means that even if you have a 401(k) through your employer, you can still open and contribute to an IRA.

Tax Deductibility: If you have a 401(k) or other employer-sponsored retirement plan, it can affect the tax deductibility of your traditional IRA contributions. The tax deductibility is based on your modified adjusted gross income (MAGI) and your tax filing status.

It’s essential to note that even if your contributions to a traditional IRA are not tax-deductible due to the phase-out limits, you can still contribute to a Roth IRA as long as you meet the income requirements. Roth IRA contributions are made with after-tax dollars, so they do not offer an upfront tax deduction. However, qualified withdrawals from a Roth IRA are tax-free in retirement, including both contributions and investment earnings.

At Insight, we understand the importance of making informed decisions when it comes to your investments and retirement savings. The impact of having a 401(k) on your IRA contributions can be complex, but we are here to help you navigate through it. Our team of knowledgeable financial advisors in San Ramon, CA and Houston, TX are equipped to guide you through the intricacies of retirement planning and investment strategies. Whether you have questions about maximizing your contributions, understanding tax implications, or choosing the right mix of retirement accounts, we are committed to providing personalized solutions tailored to your unique needs and goals. With Insight, you can trust that your investments are in capable hands as we strive to empower you with the knowledge and tools necessary to secure a brighter financial future. Contact us today to discover how we can assist you on your investment journey.

Reviewed by,

Chad Seegers, CRPC®

Chad began his career with Sagemark Consulting in 2005 and then became a Select member of Sagemark’s Private Wealth Services which operated as a national resource for financial planners focusing on Advanced Strategies in the High Net Worth marketplace. Chad then began his partnership with Insight Wealth Strategies in 2013 focused on retirement planning primarily with Oil and Gas employees and executives. His primary areas of expertise are retirement, estate, and investment strategies as he serves as Investment Strategist for the financial planning team.

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Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.