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Home>Daily Capital>Retirement Planning>Can I Contribute To A 401k And An IRA?

Can I Contribute To A 401k And An IRA?

It is a question that comes up frequently when it comes to retirement planning: Can I contribute to a 401(k) and an IRA? The simple answer is yes, you can. However, there are some caveats when it comes to deducting your IRA contributions if you participate in both types of plans.

Fortunately for your retirement nest egg, you can contribute to both types of retirement accounts. In fact, both workplace and individual retirement accounts represent important building blocks in your retirement savings. Supplementing your workplace retirement account is a great way to boost your retirement savings and put even more of your money to work in tax-advantaged accounts.

An added bonus: IRAs also often offer more investment options than the typical 401(k) plan. Just as with your traditional 401(k), you may contribute pretax dollars to a traditional IRA and then benefit from tax-deferred growth and distributions. As I later cover, be aware that you can only contribute pretax dollars if you stay under certain income thresholds.

Read More: When is the IRA Contribution Deadline?

401(k) and IRA contributions limits for 2022

While contributing to both a 401(k) and IRA is certainly allowed, there are a few considerations to keep in mind. The first is the contribution limits the IRS places on each type of account, which are outlined in the table below.

Contributions

Account Type Contributions
Traditional IRA Frequently made with pre-tax dollars. Can contribute up to $6,000 in 2022 ($7,000 if you are age 50 or older).*
Roth IRA Made with after-tax dollars. Can contribute up to $6,000 in 2022 ($7,000 if you are age 50 or older).*
Traditional 401(k) Made with pre-tax dollars. Can contribute up to $20,500 in 2022. If you are over age 50, you may contribute up to an additional $6,500/year.
Roth 401(k) Made with after-tax dollars. Can contribute up to $20,500 in 2022. If you are over age 50, you may contribute up to an additional $6,500/year.

Eligibility

Account Type Eligibility
Traditional IRA Anyone can participate, but you must have earned income. The SECURE Act, passed in December 2019, allows traditional IRA owners with earned income to keep making contributions regardless of their age. **
Roth IRA Contributions can be made at any age, and you must have earned income. There are eligibility restrictions based on your filing status and income. Learn about these restrictions here. **
Traditional 401(k) You must work for an employer that provides a 401(k).
Roth 401(k) You must work for an employer that provides a Roth 401(k). There are no income limits like a Roth IRA has.

Taxes on withdrawals

Account Type Taxes on Withdrawals
Traditional IRA Assuming an individual received a tax deduction for each contribution, all withdrawals are taxed at federal and state income tax rates.
Roth IRA None for qualified distributions.
Traditional 401(k) All withdrawals are taxed at federal and state income tax rates.
Roth 401(k) None for qualified distributions.

Penalties

Account Type Penalties
Traditional IRA 10% penalty on withdrawals made before age 59 ½. There are some exceptions.
Roth IRA 10% penalty on withdrawals of investment earnings made before age 59 1/2, with a few exceptions. You can generally withdraw your contributions at any time.
Traditional 401(k) 10% penalty on withdrawals made before age 59 ½. There are some exceptions.
Roth 401(k) 10% penalty on withdrawals of earnings before age 59 ½ and/or before meeting the 5-year rule.

Required minimum distributions

Account Type RMDs
Traditional IRA If you were born after June 30, 1949 then you must take RMDs April 1 of the year following the calendar year in which you reach age 72. After the first year, RMDs must be satisfied by December 31.
Roth IRA None during your lifetime.
Traditional 401(k) Generally, April 1 following the later of the calendar year in which you reach age 72 OR retire (if your plan allows this). After the first year, RMDs must be satisfied by December 31. If you’re still working, generally you don’t have to take RMDs.
Roth 401(k) RMDs must begin by age 72. After the first year, RMDs must be satisfied by December 31. If you’re still working, generally you don’t have to take RMDs.

* The IRA contribution limit does not apply to rollovers.

Read More: 401(k) Rollover Options

Remember that contribution limits apply to the total of your contributions to all of your retirement accounts, either IRA or 401(k). Note that the chart above includes the Roth option – which has been available for 401(k)s and IRAs since 2006.

Paying attention to these limits is important. If you do contribute more to your IRA accounts than is allowed (this frequently happens for individuals making Roth contributions), you’ll face a penalty in the form of a tax on the excess contributions for each year they remain in the account.

Putting too much into a 401(k) happens from time to time, especially for those that change jobs throughout the year, but occurs rarely if you were fully employed at only one company for all twelve months, as most plan administrators won’t allow it.

Thankfully, if either of the situations occur, you have until April 15th of the following year to remove the excess funds.

If you miss that deadline, you should work with a CPA to calculate any tax liability.

IRA deduction limits for 2022

If you save with both a 401(k) and a traditional IRA, you may also face some limits on your ability to deduct your contributions depending on your income. Contributions to a Roth are never deductible.

For instance, if you are covered by a retirement plan at work:

  • You can deduct up to the contribution limit, if you’re single and your Modified Adjusted Gross Income (MAGI) is $68,000 or less for 2022. You can take a partial deduction if your income is between $68,000 and $78,000 in 2022. There’s no deduction for people who earn more than $78,000 in 2022.
  • If you’re married and filing jointly, you can deduct the full amount if your MAGI is $109,000 or less in 2022. You can take a partial deduction if your income is between $109,000 and $129,000 in 2022. There’s no deduction if you earn more than $129,000 in 2022.

Making pre-tax IRA contributions is a great way to save on taxes and invest for retirement. If your MAGI is above the threshold, your contribution would be considered nondeductible. There may be alternative and potentially better strategies to explore instead of making nondeductible contributions. Some other avenues to consider would be a Roth IRA and a taxable brokerage account.

Examples of how you can contribute to both plans

Let’s look at an example of how you can combine the power of a 401(k) and an IRA to speed up your retirement savings.

Example #1: Consider a 30-year-old earning $55,000 per year. Her first priority should be saving at least enough in her workplace retirement plan to earn the full employer match, which in her case is 50% of the first 6% saved (a typical match scenario).

In this case, she’s saving nearly $5,000 in tax-deferred funds in her 401(k) ($3,300 + $1,650 match). However, perhaps she’s anticipating earning far more in the near future and wants to sock away some after-tax money while she’s still in a relatively low tax bracket. She could save an additional $6,000 in a Roth IRA. That brings her total annual contributions to $10,500, all of it growing in tax-advantaged accounts.

Example #2: Next, consider a married 55-year-old woman earning $300,000 per year. Say she’s maxing out her workplace 401(k) at her $20,500 yearly contribution limit. Because she’s over 50, she also gets to make a catch-up contribution of $6,500 to her 401(k). Luckily, her work matches contributions dollar-for-dollar up to 6% of her salary – which means another $18,000 in her 401(k), for a total of $45,000 that is pre-tax and will grow tax-deferred.

While she can also contribute $7,000 to a traditional IRA, her contributions will be nondeductible given her MAGI level. The gains associated with the nondeductible contributions will still grow tax-deferred, so she decides it’s still a worthwhile retirement savings vehicle to pursue, despite the fact that it’s tied up for the next 4.5 years. If she felt like she needed the money before age 59 ½ , she could have contributed to a taxable account, where there is no age restriction for distributions.

Retirement contribution growth over time

AGE YEARS WORKED NO GROWTH 8% GROWTH
22 0 $0 $0
23 1 $8,000.00 $8,000.00
24 2 $28,500.00 $29,140.00
25 3 $49,000.00 $51,971.20
30 8 $151,500.00 $196,628.06
35 13 $254,000.00 $409,176.45
40 18 $356,500.00 $721,479.77
45 23 $459,000.00 $1,180,355.80
50 28 $561,500.00 $1,854,595.24
55 33 $664,000.00 $2,845,274.18
60 38 $766,500.00 $4,300,906.56
65 43 $869,000.00 $6,439,708.09

 

Based on the above chart, you can see how 401(k) savings can really start adding up over time. The “no growth” end assumes a consistent maximum contribution at the 2022 limit of $20,500 after the first year contribution of $8,000 with zero company match and zero growth. The “8% growth” column assumes a consistent maximum contribution of $20,500 plus an 8% annual rate of return with zero company match.

Suggested next steps for you

Whether you’re looking for additional tax deductions or just a way to boost your savings, talk to a financial advisor about opening an IRA in addition to your workplace 401(k). Once you retire, you’ll be glad you saved for all those years.

  1. Sign up for Personal Capital’s free financial tools.
  2. Link your financial accounts, like your 401(k) and IRA, and run the Retirement Planner to project your chances for a successful retirement.
  3. Consider talking to a financial advisor about your retirement plan.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Paul Layton is a financial advisor at Personal Capital. Prior to Personal Capital, Paul served as a Financial Analyst at Ayco, a Goldman Sachs Company.
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