When saving for retirement, a 401(k) and an IRA are helpful tools to put away tax-advantaged funds for the future. If you’re working for a company with a 401(k) offering, you may wonder if you can have an IRA, too. While limits and income restrictions apply, it’s possible to contribute to a 401(k) and an IRA (traditional and Roth) in the same tax year. Here’s a closer look at what you need to know when you want to save in a 401(k) and IRA simultaneously to make the most of every dollar you put away for your retirement years.
Keep in mind: To contribute to an IRA, you need earned income. People who qualify also can open a spousal account for a spouse who doesn’t have earned income.
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How a 401(k) works
A 401(k) is an employer-sponsored retirement plan where you can typically contribute a percentage or fixed amount from each paycheck. If you work for an employer with a top-tier plan, they will match contributions up to a certain amount, often around 3% to 6% of your pay, as an added benefit.
While 401(k)s have limited investment choices and often higher fees when compared to IRAs, the ability to save and invest for retirement with a tax advantage—and potentially an employer match—usually makes it well worth participating. The employer match is like free money on top of your regular paycheck. Savvy employees don’t leave free money on the table.
By default, most contributions to 401(k) plans are made pre-tax. This means income for your contributions isn’t taxed the year you contribute, but you’ll have to pay taxes on withdrawals in retirement. Assuming you have a lower income and tax rate in retirement, that’s a valuable benefit. However, withdrawing early—before age 59½ in the eyes of the IRS—leads to taxes and penalties. However, withdrawing early—before age 59½ in the eyes of the IRS—leads to taxes and penalties. In 2024, contributions are limited to $23,000, but if you are 50 or older you can make an additional catch-up contribution of $7,500.
Note that 401(k)s are subject to required minimum distributions (RMDs), which currently start at age 73. These mandated withdrawals from your account are taxed at your current income tax rate. The only exception: If you’re still employed at 73 or older, you don’t have to take a RMD from the 401(k) at your current employer. You will still owe them on any 401(k) funds you have at previous employers.
Some employers also offer a Roth 401(k) option for after-tax contributions and withdrawals. These work similar to Roth IRAs, which are discussed below. One important difference, though: Roth designated 401(k)s have no income limitations for making a contribution.
401(k) benefits and drawbacks
Here are the top pros and cons to consider when participating in a 401(k).
Pros
- Tax-advantaged retirement contributions: Save for retirement with a tax advantage compared to a standard bank or investment account.
- Employer matching contribution opportunities: Employers often match a percentage of your salary when you participate in a 401(k) plan.
- Automated contributions: Funds are taken from your paycheck before they land in your bank account, making investments extremely easy to manage.
Cons
- Can have high investment fees: Investment fees can take a big chunk of your potential investment return over time. Consider fees in choosing your investments within the plan.
- Limited investment choices: Many 401(k) plans offer a limited number of mutual funds and exchange-traded funds (ETFs).
- Account locked to your employer: You can’t move the account until you leave your job, which means you can only use the financial institution your employer chooses.
How an IRA works
An IRA is a retirement account that you can open and maintain at any financial institution you choose, and for which you can buy a wide variety of investments. The best Roth IRA and traditional IRA accounts don’t charge recurring fees. You’ll likely only pay fees for trades and less-common account services. Many online brokerage accounts don’t charge any trading commissions.
You can contribute to an IRA without having a 401(k), as long as you have earned income. For 2024, you can contribute up to $7,000 per year or $8,000 if you’re age 50 or older. People who qualify to contribute also can open a separate spousal account for a spouse who doesn’t have earned income. There are two types of IRAs: traditional and Roth. Both are tax-advantaged, but they have different requirements and benefits.
Traditional IRA
When you contribute to a traditional IRA, you use pre-tax dollars. That means you generally get a tax deduction in the year that you make the contribution. While the money is in your account, it grows tax-free—you owe no taxes on investment earnings. However, when it’s time to make withdrawals from your account (usually at retirement), they are taxed at your income tax rate for the year when you make each one.
If you or your spouse work where there is an employer retirement plan, your ability to deduct traditional IRA contributions may be limited or disappear, depending on your income. Even with that limitation, however, the years of tax-free growth on your investments can make a traditional IRA worth having—especially if you earn too much to qualify to contribute to a Roth IRA.
Like 401(k)s, traditional IRAs are subject to required minimum distributions (RMDs). And, as with a 401(k), early withdrawals are subject to taxes and penalties.
Roth IRA
With a Roth IRA, contributions are made with after-tax dollars. This means that, unlike with a traditional IRA, you pay taxes on contributions the year they are made. Here’s the payoff: Qualified withdrawals in the future are tax-free—and that includes not just your original contributions but everything those investments earned over the years. For younger investors with decades before retirement, that’s an extremely valuable tax advantage.
What’s more, Roth IRAs are not subject to RMDs in the account owner's lifetime, another advantage. You can keep your investments earning tax-free income until you are ready to withdraw them—or pass the entire account to your heirs (who will owe RMDs).
As with a 401(k) and traditional IRA, early withdrawals are subject to taxes and penalties.
The main restrictions on Roths are income-based: High earners are banned from contributing to a Roth IRA, with a phase-out as income grows. There is, however, a workaround for higher income individuals called a backdoor Roth. In this strategy, money from a traditional IRA account is rolled over into a Roth account, with the account owner paying income taxes on the transfer.
IRA benefits and drawbacks
Like 401(k) accounts, IRAs have pros and cons to consider.
Traditional IRAs
Pros
- Tax-deductible contributions: Except in certain circ*mstances (as noted above), you get a tax deduction for your contributions.
- Choose where to open an account: You can choose any financial institution that offers IRAs.
- Choose from a wide variety of investments: Invest in any ETFs, mutual funds, stocks, bonds or other traditional investments offered by your brokerage.
Cons
- Lower annual contribution limits: IRA and Roth IRA accounts are subject to lower contribution limits than 401(k) accounts.
- Income limits may apply to tax deductions on contributions: If you or your spouse work for a company that offers a retirement plan and you earn above a certain amount, your contributions may not be tax-deductible, or only partially deductible.
- Required minimum distributions: Traditional IRAs are subject to RMDs.
Roth IRAs
Pros
- Tax-free withdrawals: You can withdraw earnings without being subject to taxes after age 59½.
- No RMDs: Roth IRAs are not subject to required minimum distributions in your lifetime. Non-spouse heirs will need to make them, however. There are different rules for spouses.
- Choose where to open an account: You can choose any financial institution that offers Roth IRAs.
- Choose from a wide variety of investments: Invest in any ETFs, mutual funds, stocks, bonds, or other traditional investments offered by your brokerage.
Cons
- Lower annual contribution limits: Traditional IRA and Roth IRA accounts are subject to lower contribution limits than 401(k) accounts.
- Income limits may apply: If your income exceeds IRS limits—starting at $146,000 per year for a single filer in 2024—you can’t contribute to a Roth IRA or may have lower contribution limits.
401(k) vs. Roth IRA: Which account is better?
Is a 401(k) or Roth IRA better? Neither is better or worse. Each has strengths and weaknesses. Savvy investors take advantage of both by maximizing their tax-advantaged contributions to each, depending on how much they can afford to set aside for retirement.
Unlike IRAs, 401(k)s have fairly high contribution limits, as noted above, and the potential for employer matching contributions. Traditional and Roth IRAs have a wider variety of investment choices and lower fees.
Benefits of contributing to both a 401(k) and Roth IRA
Savvy retirement savers who can afford it contribute to both. Wise investors often prioritize their contributions to ensure they reach the following goals:
- Take advantage of the full employer 401(k) match: The first focus for most should be contributing enough to receive the full employer match. Not doing so is like leaving money on the table.
- Max out IRA contributions: Depending on your age, the next place to focus is contributing to a Roth IRA, if you're eligible for one, to build up savings that are tax free when you withdraw them in retirement. .
- Invest more in your 401(k) if you can: If you have the means to put away more for retirement, return to your 401(k) until you reach the annual limit. For 2024, that’s $23,000 per year, plus an additional $7,500 if you are 50 or older.
If you reach the maximum contribution limits you can contribute to a 401(k) and IRA, consider investing in a taxable brokerage account with additional available funds.
How to invest with both account types
Setting up contributions in both accounts is a relatively straightforward process. Each account is independent of the other, so you manage them separately.
For a 401(k), you’ll generally set up contributions through your employer or plan administrator’s website. If you’re unsure how to manage contributions at your company, ask your human resources department or talk to your manager. It’s usually as simple as logging into a specific website, deciding what percentage of your pay you want to contribute, and choosing investments offered by the plan.
You’ll need to take a few more steps for a traditional IRA or Roth IRA. If you don’t already have one, you’ll need to pick a financial institution, such as a brokerage, bank, or investment firm, paying close attention to fees and available investments. Once your account is open, you can contribute at any time. For many people, the best option is to automatically transfer funds from a bank account. You can even set up automatic contributions that, over the course of the year, hit the annual contribution limit.
TIME Stamp: Most people with earned income can contribute to both IRAs and 401(k)s
You can have a 401(k) and an IRA (or both types of IRA) and make tax-advantaged contributions to both if you don’t earn too much . The earlier you start and the more you can save towards retirement, the better.
If you have old 401(k) accounts from past employers, it may be wise to roll them into an IRA to help avoid fees and get more investment choices.
Frequently asked questions (FAQs)
How much can I put in a traditional IRA if I have a 401(k)?
401(k) limits and IRA limits are independent of each other. You can invest up to the annual IRS limit in your traditional or Roth IRA regardless of your 401(k) investments. Note that the IRA contribution limit is for as many IRAs as you have. If you have a traditional and a Roth IRA, the maximum you can contribute in total to both accounts in 2024 is $7,000 per year—$8,000 if you’re age 50 or older.
How much can you contribute to a 401(k) and a Roth IRA in the same year?
You can invest in both accounts up to annual IRS limits. For 2024, the maximum is $23,000 for a 401(k) and $7,000 for an IRA. Depending on your age and income, your Roth IRA limit may differ.
How does having a 401(k) affect IRA contributions?
Having a 401(k) doesn’t affect your IRA contributions in any way. Both accounts are independent of each other.
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