Can I contribute to both a 401(k) and an IRA, and what are the benefits of doing so?
3 min read
If you're looking for ways to save for retirement, you might wonder if you can contribute to a 401(k) and an IRA. The answer is yes, you can, and doing so has some benefits.
A 401(k) is an employer-sponsored retirement plan that allows you to save a portion of your pre-tax income for retirement. Your employer may also match some or all of your contributions, essentially free money. A 401(k) has a higher annual contribution limit than an IRA, which is $22,500 for 2021 (or $30,000 if you're 50 or older).
An IRA is an individual retirement account you can open on your own, regardless of whether you have a 401(k). There are two types of IRAs: traditional and Roth. A traditional IRA allows you to save pre-tax income for retirement. Still, you'll have to pay taxes when you withdraw the money in retirement. A Roth IRA allows you to save after-tax income for retirement, but you'll enjoy tax-free withdrawals in retirement. An IRA has a lower annual contribution limit than a 401(k), which is $6,500 for 2023 (or $7,500 if you're 50 or older).
So why would you want to contribute to a 401(k) and an IRA?
Here are some benefits of doing so:
Save more money for retirement: By maxing out both accounts, you can save up to $25,500 (or $33,000 if you're 50 or older) per year. That's a lot more than saving in either account alone.
Diversify your tax situation: By having both pre-tax and after-tax accounts, you can have more flexibility and control over your tax bill in retirement. For example, you can withdraw from your traditional IRA when your income is low and your Roth IRA when your income is high, or vice versa.
Of course, contributing to both a 401(k) and an IRA has some drawbacks and limitations. For example:
You may not be eligible to deduct your traditional IRA contributions if you or your spouse have a 401(k) and your income exceeds certain thresholds. You may not be eligible to contribute to a Roth IRA if your income exceeds certain thresholds. For 2023, the contribution phases out if your MAGI is between $138,000 and $153,000 for single filers or between $218,000 and $228,000 for married couples filing jointly.
You may have to pay fees and penalties if you withdraw money from either account before age 59½ (unless you qualify for an exception). If you're looking for ways to save for retirement, consider contributing to a 401(k) and an IRA to maximize savings, diversify your tax situation, and access different investments. However, be aware of income limits and potential fees for early withdrawals.
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