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.
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 contribution limits for both accounts:
- In 2020, you can contribute up to $19,500 to a 401(k) plan. If you’re 50 or older, that annual maximum jumps to $26,000.
- In 2020, you can contribute up to $6,000 to an IRA, or $7,000 if you’re 50 or older. You can contribute that amount to a traditional IRA or a Roth IRA, or you can divvy up your money into each type of plan. (The IRA contribution limit is a combined annual maximum: You can put a total of $6,000 into traditional and Roth IRAs; you can’t put $6,000 in each account.)
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)
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