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Can I Contribute To A 401k And An IRA?

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.

Read More: When is the IRA Contribution Deadline?

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 contributions limits are up from $5,500 in 2018 ($6,500 for those 50 or older).
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.
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.
Eligibility You must work for an employer that provides a Roth 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 contributions limits are up from $5,500 in 2018 ($6,500 for those 50 or older). 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.
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 Roth 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: Next, 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-deferred.

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-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.*

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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24 Comments

  1. Peter

    I did exactly what Stoyan mentioned. My question is, after doing all that, can I still make a non-deductible contribution (5500 for 2015) to a traditional IRA and do another backdoor conversion to Roth?

    Reply
  2. SavvyFinancialLatina

    Very useful information. This year I’m planning to max out my 401K, ROTH IRA, and my husband’s traditional IRA.

    Reply
  3. Barbara Friedberg

    My husband and I have been contributing the max to workplace retirement accounts, IRA (or Roth IRA’s) and whatever tax deferred options are available. I currently also contribute the max to an HSA. We’ve sacrificed a lot to save and aggressively invest, and it has paid off.

    Reply
    • tm

      Have you retired yet? You won’t know how well you’ve made out until you start withdrawing; heaven forbid another financial crisis when you retire. I prefer to manage my own IRA. That way I can convert to cash whenever, no management fees and higher returns.

      Reply
  4. Alberto Grazi

    In case #3 it would be advisable to make a backdoor Roth IRA contribution by immediately convert the IRA to Roth IRA (which can be regardless of income levels and carries zero taxes as the IRA contribution was not deductible due to the high AGI)

    Reply
    • Financial Samurai

      Alberto,

      Can you expound on the backdoor ROTH IRA? We’ve had some discussions about it, and I’m not sold. You mention that a backdoor ROTH IRA “carries zero taxes.” Please explain as I thought the whole issue of conversion is for the government to make people convert to get your taxes up front.

      thx

      Reply
      • mark

        As Alberto mentioned, the backdoor is a way around the income limits on a roth ira. You first contribute post tax income to a regular ira. Then you convert it to a roth ira (or into an existing account). You will pay taxes on any gains (since an ira is taxable on withdrawal loke a 401k), but if you do this quickly you’ll have little to no additional taxes. Chaulk this up to the law of intended consequences as this was never meant to work this way, but it’s perfectly legit.

        Mark

        Reply
        • Anonymous

          Yes, but you’re just paying taxes on the contribution “now” rather than waiting ’til retirement.
          What difference does that make? Pay now, pay later. I’m 70, still have a substantial income from investments, and guess what. The government bases your social security payments on earned income, but they tax you on all your income. Nothing is fair about the way our government makes us pay. Then our elected officials go by a different set of rules.

          Reply
          • Stoyan Iordanov

            You’re paying the taxes now regardless, this us after-tax money anyway (assuming you’ve already maxed pretax options such as 401(k)).

            The difference is that, with the backdoor Roth, you’re saving yourself from having to pay tax on the future capital gains.

            It’s just one more way to save money on taxes, after having exhausted the obvious options.

    • Stoyan Iordanov

      +1. This is a great way for high-income earners to save.

      Here is how it works, if you want to save to the max:

      1. You max out your pre-tax 401(k). (Technically not required, but good practice anyway).
      2. You max out your after-tax 401(k).
      3. Immediately upon making the after-tax 401(k) contributions, you call your plan provider and request “in-plan conversion” of the after-tax portion. This could be either to a Roth IRA, or Roth 401(k), if your plan offers it.

      Even though this doesn’t save you from having to pay income taxes on the money to be contributed after-tax, it does allow it to grow tax-free from then on.

      Reply
  5. Financial Samurai

    One of my regrets was not contributing to an IRA back in 1999 when I had the chance. I viewed the $2,000 contribution amount to be not much back then, but savings is savings right?

    I’m disappointed the government caps the income limit at only $60,000 to provide tax free contribution to an IRA. You’d think that saving for retirement is a right for all, even those making $60,000. What about all those who live in expensive cities such as SF, NYC, and LA?

    Let’s make things more equal for everybody.

    Reply