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Short answer: Yes, you can contribute to both a 401(k) and an IRA, but if your income exceeds the IRS limits, you might lose out on one of the tax benefits of the traditional IRA.
How it works: One of the benefits of a traditional IRA is that you can get a tax deduction for your contributions each year. If you contribute, say, $6,000 to a traditional IRA this year, you can claim that contribution on your tax return and reduce your taxable income by that amount. (In fact, 401(k)s offer a very similar tax break: Your 401(k) contributions reduce your taxable income.)
But there’s a big caveat: If you have a 401(k) or other retirement plan at work, or your spouse does, then your contribution to a traditional IRA may not be deductible. People who have a retirement plan at work need to look at the IRA income limits to see if they qualify to deduct their contribution to a traditional IRA. In some cases, you may be able to deduct a portion of your contribution. (Even if you’re ineligible to deduct your IRA contribution, you can still contribute to an IRA. Read more about nondeductible IRAs.)
Note: You can always contribute to both a Roth IRA and a 401(k), as long as your income makes you eligible for a Roth.
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How to choose between an IRA and a 401(k)
If you have a 401(k) at work, you may be trying to figure out if it makes sense to open up an IRA. First, understand the annual contribution limits for both accounts:
401(k): You can contribute up to $19,500 in 2021 and $20,500 for 2022 ($26,000 in 2021 and $27,000 in 2022 for those age 50 or older).
Here’s a good way to approach deciding between a 401(k) and an IRA, assuming you can’t max out both:
If your employer offers a 401(k) match, contribute enough to get all of that free money.
Once you’re set up to get the full match in your 401(k), next consider contributing to an IRA. If you’re eligible for the tax deduction, a traditional IRA can offer a lot of benefits beyond that tax break, including access to low-cost investments and low or zero administrative fees. A Roth IRA is another great option.
If you’re not eligible to claim the traditional IRA tax deduction or a Roth isn’t right for you, then sticking with your 401(k) might make the most sense.
» Still not sure? Read our road map for choosing between an IRA vs. 401(k)
» Ready to decide? Check out all of our picks for the best IRA accounts