• Retirement Planning

Can I Contribute To A 401k And An IRA?

March 7, 2014 | Mike Pasieka, CFA, CAIA

This question comes up frequently when it comes to retirement: can I contribute to a 401k and an IRA? 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 building 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 401k plan. Just as with your traditional 401k, you may contribute pretax dollars to a traditional IRA (as I discuss further, you can only contribute pretax dollars up to certain income levels) and then benefit from tax-deferred growth and distributions.

Contribution Limits For A 401k And An IRA

While contributing to both a 401k 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.

Traditional IRA
Contributions Frequently made with pre-tax dollars. Can contribute up to $6,000 in 2019 ($7,000 if you are age 50 or older).* The 2019 contribution limits are up from $500 from 2018
Eligibility Anyone can participate, but you must have earned income. Contributions can only be made until age 70 ½
Taxes on Withdrawals Assuming an individual received a tax deduction for each contribution, all withdrawals are taxed at federal and state income tax rates.
Penalties 10% penalty on withdrawals made before age 59 ½. There are some exceptions.
RMDs Must begin taking RMDs by age 70 ½.
Roth IRA
Contributions Made with already taxed dollars. Can contribute up to $6,000 in 2019 ($7,000 if you are age 50 or older).* The 2019 contributions limits are up from $5,500 in 2018 ($6,500 for those 50 or older).
Eligibility Contributions can be made at any age, and you must have earned income.

There are restrictions based on your filing status and income. Some of these restrictions have changed for 2019. Click here for 2019 limits.

Taxes on Withdrawals None for qualified distributions.
Penalties 10% penalty on withdrawals of earning made before age 59 1/2, with a few exceptions. You can generally withdraw your contributions at any time.
RMDs None during your lifetime.
Traditional 401k
Contributions Made with pre-tax dollars. Can contribute up to $19,000 in 2019 ($18,500 in 2018). If you are over age 50, you may contribute up to an additional $6,000/year (this remains unchanged from 2018).
Eligibility You must work for an employer that provides a 401k.
Taxes on Withdrawals All withdrawals are taxed at federal and state income tax rates.
Penalties 10% penalty on withdrawals made before age 59 ½. There are some exceptions.
RMDs If you are retired, must begin taking RMDs by age 70 ½.
Roth 401k
Contributions Made with already taxed dollars. Can contribute up to $19,000 in 2019 ($18,500 in 2018). If you are over age 50, you may contribute up to an additional $6,000/year (this remains unchanged from 2018).
Eligibility You must work for an employer that provides a 401k. There are no income limits like a Roth IRA has.
Taxes on Withdrawals None for qualified distributions.
Penalties 10% penalty on withdrawals of earning made before age 59 1/2, with a few exceptions. You can generally withdraw your contributions at any time.
RMDs If you are retired, must begin taking RMDs by age 70 ½.
Traditional IRA Roth IRA Traditional 401k Roth 401k
Contributions Frequently made with pre-tax dollars. Can contribute up to $6,000 in 2019 ($7,000 if you are age 50 or older).* The 2019 contribution limits are up from $500 from 2018 Made with already taxed dollars. Can contribute up to $6,000 in 2019 ($7,000 if you are age 50 or older).* The 2019 contributions limits are up from $5,500 in 2018 ($6,500 for those 50 or older). Made with pre-tax dollars. Can contribute up to $19,000 in 2019 ($18,500 in 2018). If you are over age 50, you may contribute up to an additional $6,000/year (this remains unchanged from 2018). Made with already taxed dollars. Can contribute up to $19,000 in 2019 ($18,500 in 2018). If you are over age 50, you may contribute up to an additional $6,000/year (this remains unchanged from 2018).
Eligibility Anyone can participate, but you must have earned income. Contributions can only be made until age 70 ½ Contributions can be made at any age, and you must have earned income.

There are restrictions based on your filing status and income. Some of these restrictions have changed for 2019. Click here for 2019 limits. Click here for 2018 limits.

You must work for an employer that provides a 401k. You must work for an employer that provides a 401k. There are no income limits like a Roth IRA has.
Taxes on Withdrawals Assuming an individual received a tax deduction for each contribution, all withdrawals are taxed at federal and state income tax rates. None for qualified distributions. All withdrawals are taxed at federal and state income tax rates. None for qualified distributions.
Penalties 10% penalty on withdrawals made before age 59 ½. There are some exceptions. 10% penalty on withdrawals of earning made before age 59 1/2, with a few exceptions. You can generally withdraw your contributions at any time. 10% penalty on withdrawals made before age 59 ½. There are some exceptions. 10% penalty on withdrawals of earning made before age 59 1/2, with a few exceptions. You can generally withdraw your contributions at any time.
RMDs Must begin taking RMDs by age 70 ½. None during your lifetime. If you are retired, must begin taking RMDs by age 70 ½. If you are retired, must begin taking RMDs by age 70 ½.

* The IRA contribution limit does not apply to:

Remember that contribution limits apply to the total of your contributions to all of your retirement accounts, either IRA or 401k. Note that the chart above includes the Roth option – which has been available for 401ks 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 6% tax on the excess contributions for each year they remain in the account.

Putting too much into a 401k happens from time to time, especially for those that change jobs throughout the year but is rare to occur 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.

Have more questions? Contact a financial advisor.

IRA Deduction Limits

If you save with both a 401k 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 AGI is $64,000 or less for 2019. This is up from $63,000 in 2018. You can take a partial deduction if your income is between $64,000 and $74,000 in 2019 (between $63,000 and $73,000 in 2018). There’s no deduction for people who earn more than $74,000 in 2019 ($73,000 in 2018).
  • If you’re married and filing jointly, you can deduct the full amount if your modified AGI is $103,000 or less in 2019 (up from $101,000 in 2018). You can take a partial deduction if your income is between $103,000 and $123,000 in 2019 (between $101,000 and $121,000 in 2018). There’s no deduction if you earn more than $123,000 in 2019 ($121,000 in 2018).

Deducting your contributions is always an added bonus, but keep in mind even that if you’re above the limit to make a contribution and reduce your taxes, there are alternative and potentially better strategies to explore than the nondeductible Traditional IRA.

Examples Of How You Can Contribute To Both A 401k And An IRA

Let’s look at an example of how you can combine the power of the 401ks and IRAs to speed up your retirement savings:

Example #1: Consider a 30-year-old earning $55,000 per year (22% federal marginal tax bracket). 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 401k ($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: Finally, consider a married 55-year-old woman earning $300,000 per year. Say she’s maxing out her workplace 401k at her $19,000 yearly contribution limit. Because she’s over 50, she also gets to make a catch-up contribution of $6,000 to her 401k. Luckily, her work matches contributions one-for-one up to 6% of her salary – which means another $18,000 in her 401k, for a total of $43,000 that is pre-tax and will grow tax-free.

While she can also contribute $6,500 to a traditional IRA, her contributions will be nondeductible given her modified AGI level. The savings will still grow tax-free, 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.*

Retirement Contributions Add Up Over Time

AGE YEARS WORKED LOW END HIGH END
22 0 $0 $0
23 1 $8,000.00 $19,000.00
24 2 $27,000.00 $41,040.00
25 3 $46,000.00 $64,843.20
30 8 $141,000.00 $215,658.59
35 13 $236,000.00 $437,255.87
40 18 $331,000.00 $762,854.97
45 23 $426,000.00 $1,241,266.88
50 28 $521,000.00 $1,944,210.93
55 33 $616,000.00 $2,977,066.37
60 38 $711,000.00 $4,494,669.85
65 43 $806,000.00 $6,724,527.26

Based on the above chart, you can see how 401k savings can really start adding up over time. The low end assumes a consistent maximum contribution at the 2019 limit of $19,000 after the first year contribution of $8,000 with zero company match and zero growth. The high end column assumes a consistent maximum contribution of $19,000 plus an 8.0% annual rate of return with zero company match.

Our Take

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

For more information, contact a financial advisor.

* There are advanced planning strategies if an individual has a large non-deductible IRA balance. Speak with an advisor if you are interested in exploring tax-savings strategies.

Disclaimer: 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. No part of this blog, nor the links contained therein is a solicitation or offer to sell securities. Third party data is obtained from sources believed to be reliable; however, Personal Capital Corporation (“Personal Capital”) cannot guarantee the accuracy, timeliness, completeness or fitness of this data for any particular purpose. Third party links are provided solely as a convenience and do not imply an affiliation, endorsement or approval by Personal Capital of the contents on such third party websites. Certain sections of this blog may contain forward-looking statements that are based on our reasonable expectations, estimates, projections and assumptions. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind 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.

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