Are You Allowed to Have Both a 401k Plan and an IRA Simultaneously?

03
May

You may be considering different retirement strategies. Choosing the right retirement plan can certainly be tricky. You may, for example, be having trouble choosing between your employer’s 401k plan and setting up your own IRA. Both have qualities that sound very favorable to you. You may be wondering if you can have both at the same time. To help, here is an explanation of the benefits of both retirement strategies as well as an answer to this question.

401k Plans

A 401k plan is a kind of retirement plan that is offered by businesses, schools, and non-profit organizations to their employees. One convenient element of a 401k plan is that a person does not need to worry about maintaining it. After an employee signs up for a 401k plan, part of his or her salary is automatically deposited into this plan with each paycheck.

However, the real upside to 401k plans is the tax benefits associated with them. When money is taken out of an employee’s paycheck and placed into the plan, no tax is applied to those contributions. This can provide many obvious strategic advantages.

First of all, the contributions made into the account lower the amount of income a person has to pay income taxes on. In this way, it lowers your taxes now.

Another tax benefit may come for certain people later. Many people who retire end up retiring in a lower tax bracket than they were in while they were employed. Taxes are also only applied to the funds of a 401k when they are taken out. Due to this fact, the taxes that will be paid on these 401k funds will be a lot lower than if they had been applied when the funds were deposited.

IRAs

IRA is a term that stands for individual retirement account. It’s a kind of investment tool that was created for middle income people who wish to save for retirement. There are many different kinds of IRAs, but the two most popular varieties are traditional IRAs and Roth IRAs.

With a traditional IRA, you have the ability to contribute $4,000 a year into the account without paying taxes on that amount if you are over 50. For people this old with moderate sized incomes, this is a great advantage. Income taxes, however, will be applied when the money is removed.

A Roth IRA, on the other hand, operates slightly differently. A Roth IRA is different than a traditional IRA because of how taxes are applied to the funds. Unlike a traditional IRA, taxes will be applied to the funds as they are deposited into the account. However, when the money is later taken out of the account after a specified period of time, often no taxes will have to be paid on that income. This will include up to the amount originally put into the account and perhaps even more than that depending on specific circumstances.

Can You Have a 401k and an IRA at the Same Time?

You may still be wondering if you can benefit from both of these kinds of retirement accounts at the same time. The simple answer is yes you can.

You may think that investing in both kinds of accounts is impossible due to the limits for making contributions into the accounts. For example, there is a limit on 401k accounts that states you can only add $16,500 into the 401k a year if you are under 50 and $22,000 if you are over 50 and catching up with the previous year. Similarly, IRAs have maximum contribution rules as well. Currently, this limit states you can only add $5,000 into the account a year if you are under 50 and $6,000 into the account if you are over 50 and catching up with the previous year.

Thankfully, these limits are not related to each other at all. You can in fact make the maximum contribution into a 401k and into an IRA in the same year without any consequences. If you can afford both of these plans, having both may be a great idea.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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