can you have a 401k and an ira at the same time
73If you have the financial wherewithall to have the option to fund both a 401(k) and an IRA you are taking serious strides in the right direction. There is one question often arises, though. WIth all the rules surrounding retirement accounts in addtion to the sheer volume of different plans out there, can I participate in more than one at a time? Off the top of my head we have several retirment vehicles available to the general populace including 401(k), 403(b), standard IRA, Roth IRA, Roth 401(k), SEP IRA, and Simple IRA. That is a lot of different vehicles to be worried about! And the list seems to grow larger every year!
With that in mind it is time to start sharing the information that we all want. Can we actually have both a 401k and an IRA at the same time? Of course we can! But before we make it that simple, as with anything that the goverment has its claws into, there are several rules that must be heeded in order to qualify to do as such. Read below for the speicific rules that one must adhere to and a bunch of great examples from real people on how their speicifc situations fall under these rules.
So can I contribute to both a 401k and IRA?
Let's start with this question, being are we able to contribute to both. The quick answer is yes, everyone is fully able to contribute to both a 401(k) and an IRA. Of course there are maximums in place for these vehicles which must be adhered to. So the 2009 401(k) limit is $16,500 and the maximum contribution limit for IRA's is $5,000. So you may contribute to both a 401(k) and a traditional IRA in the same year.
Should I contribute to both a 401k and an IRA?
Here is where the rubber hits the road. We know that we can contribute to both vehicles, the question becomes should we contribute to both. This is where it becomes important to understand that there are certain income limits that make contributing to both not in your best economic interest. The 401k is always tax deductible. That should be a staple of your retirement windfall (especially since most employers give matching contributions). The tricky part becomes the whether the IRA portion is tax deductible if you are contributing to a 401k. This is all dependent on your modified adjusted gross income (MAGI). It also changes depending on your finling status. If single and MAGI over $53,000 then the IRA is not deductible. After $53,000 the amount deducted is reduced until it is 0 at $63,000. If married filing jointly and you contribute to a 401k then that limit is increased to $85,000 which is then decreased up until it will be 0 at $105,000.
To make it even more convoluted, if you are married filing jointly and you don't contribute to a 401k, but your spouse does then the MAGI of the couple goes up to $159,000 and phases out at $169,000.
- Self Directed Roth IRA
Determine how to use a self directed Roth IRA to your best benefit.
Roth IRA is likely your best best with 401k
If you meet the Roth IRA eligibility requirements then this is likely your best bet when combining with a 401k. There are income limits here and the money doesn't give you any pre-tax benefits, but once the money is in there all the earnings are tax free if you don't touch them until you are 59.5 years old. Sound advice is to max out your matching contributions to your employer plan (often times companies match a portion of your contribution up to 6% or similar). Make sure to take full advantage of that and then focus remaining finances on a Roth IRA for both you and your spouse (if you have one) until those are maxed out (again assuming that you fall under the ability to qualify for the Roth IRA).
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My understanding is that so long as you have a company sponsored 401k you are bound by the rule on limiting traditional IRAs. Even if the 401k option is "lousy" as you put it.
So to clarify -- if I neither contribute to, nor hold a balance in, a company-sponsored 401k, my personal IRA will still not be tax-deductible?
Sorry if I sound like I'm repeating myself, but I want to get this right.
Mike,
Here is the exact verbage from the IRS:
For 2009, if you are covered by a retirement plan at work, your IRA deduction will not be reduced (phased out) unless your modified AGI is:
* More than $55,000 but less than $65,000 for a single individual (or head of household),
* More than $89,000 but less than $109,000 for a married couple filing a joint return (or a qualifying widow(er)), or
* Less than $10,000 for a married individual filing a separate return.
http://www.irs.gov/publications/p590/ch01.html#en_
It appears that you would not be phased out per those rules.
If I stopped contributing, my modified AGI, now about 51K, would enter the 55K-65K sliding phaseout interval, since it would then include the post-tax portion of the 13K now going to my 401(k).
"[C]overed by a retirement plan at work" means exactly that. You're covered even if you're not contributing, or even if you’re not holding a balance there. It’s not fair, but such is life.
Thanks for your help.
Mike,
It does appear you are stuck between a rock and a hard place. Or should I say a crappy 401k program and the IRS! Perhaps a Roth IRA would suit you better?
I'm already looking into it.
Good deal Mike, I would think you should qualify no problem for a Roth. And if you are not going to get a tax credit for a tradtional IRA a Roth IRA would seem to be a smart move.
I make $100,000 a year plus i have a side job that makes approx $50-60k in 1099's. I max out my 401K now at 16500 and i want to do the full on the Roth IRA as well. $5000 would this be allowed? assuming my write offs bring me to about $120k a year
John,
How do you declare when you prepare your taxes? This has a large bearing on what you can and can't do in relation to Roth IRA's.
Thanks for thre fast reply.
Declare just me
not married
no kids
own a house
You are right next to the hairy edge in terms of qualifying for a Roth IRA. Being single your modified adjusted gross income has to be less than $120k (begins phaseout at $105k). I'm guessing your MAGI is pretty similar to your AGI in this case so you would likely not qualify for a Roth. Let me know if you think I have made an incorrect assumption.
MAGI is the following (from irs.gov):
Modified AGI. Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your return modified as follows.
1. Subtracting the following.
1. Roth IRA conversions included on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. Conversions are discussed under Can You Move Amounts Into a Roth IRA, later.
2. Roth IRA rollovers from qualified retirement plans included on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b.
3. Minimum required distributions from IRAs (for conversions and rollovers from qualified retirement plans only).
2. Add the following deductions and exclusions:
1. Traditional IRA deduction,
2. Student loan interest deduction,
3. Tuition and fees deduction,
4. Domestic production activities deduction,
5. Foreign earned income exclusion,
6. Foreign housing exclusion or deduction,
7. Exclusion of qualified bond interest shown on Form 8815, and
8. Exclusion of employer-provided adoption benefits shown on Form 8839.
Thank you for the advice. One last question.
I put in the max of 16.5% into my 401K does this lower my AGI to $84500?
If so then this might work for me. I want to put as much as i can away now I'm 36 and it's time as my mother says to grow up and start saving for your old age... haha
John,
401k plans are not taken into account for MAGI, so you would be correct. If you start at $100k and then max out your 401k @ 16,500 then you would lower your AGI to at a max $84,500 (you likely have other deductions as well).
If you were to only take that income into account you would also fall under the limit for Roth and be able to contribute fully into that ($5k per year).
Thank you. Morgage tax and other dedcutions. Ok here i go sign up for a roth ira
Mike,
Think of contributing to your 401k as a tax deduction since the $ you're putting in is before tax, and it ultimately reduces your taxable income. i.e. say contributing 10k to to a 401k reduces your taxable income to 43k from 53k. That's a better deal than contributing the 5k max to a traditonal IRA and only reducing your taxable income to 48k. Plus the 401k has a much higher max so you can put a lot more towards retirement.
Wags,
Agreed. A traditional IRA is not as good in general as a 401(k). However, if you qualify for a Roth IRA you may want to seriously consider that due to the historically low tax rates we are in and the likelihood that they will be headed north in the future.
I have a 401k but my husband does not. We file jointly. He can still contribute to his Traditional IRA, correct? Thanks.
I work as a dental hygienist at two offices. At one of my offices my employer set up a Simple IRA which I can contribute up to $11,500 before taxes. For tax year 2010 I have had money withheld and put into this Simple IRA. As of recently I have also started working more hours at the other office and have now became eligible to participate in their 401K which I can contribute $16,500 and they will match up to a certain amount which I contribute which would be more beneficial. Can I still contribute to the 401K plan at once office even though I have been contributing to the Simple IRA at the other office? Is there going to be a limit as to how much I can contribute?
Nice limitation on the 401k/IRA contribution - my wife was covered by a 401K for 4 weeks in January and contributed $108 to her account. Then no more covered 401K job - part time only thank you.
By the rule as far as I can determine, no additional IRA contribution is allowed for our income bracket (MAGI) because there was coverage even if only for a month! Who makes up these rules?
Oh, government officials with nice benefits who don't know what's going on in our country. More taxes, lower wages, less hours, fewer jobs, more pressure on the middle class.
I had a 401K plan for 2009 and made contributions to it. My current job though does not have one. Am i eligible to make Traditional IRA contributions for 2009 and claim tax deductions ?
Do i fall in this category --- To make it even more convoluted, if you are married filing jointly and you don't contribute to a 401k, but your spouse does then the MAGI of the couple goes up to $159,000 and phases out at $169,000.
I have a 401k through my employer. My maximum contribution is limited to about $10K because I'm in management, in a small company and the IRS has special rules if your company is "top heavy" - so I'm told. Am I then eligible for the difference of the $16.5k (ie $6.5k) and free to max out an IRA - OR - can I automatically put the "leftover $" in a Roth ? Hopefully you or someone else can help. Thanks
I have a Simple IRA right now for my LLC. If I open up new 401(k) Profit Sharing Plan, what are the consequences to my Simple IRA. Do I have to get rid of my Simple, roll it into my 401k, etc???
I'm 64 and I have both. 6 months ago I started a Roth IRA and will contribute to it for the next two years. Frankly, I wish I'd contributed to it sooner. I agree that due to the historically low tax rates we are in and the likelihood is that they'll be headed north in the future.
My wife and I have been maxing out our Roth for a few years now. Wish I would have started earlier also. We also contribute to 401k's. To be fair, hers is a 403b due to working for a non-profit.
my current company doesn't provide any retirement plan, so I've been using the traditional IRA (max for me and spouse) to invest and lower my AGI.
1) If I get a job that offers 401k in October, can I contribute the whole $16,500 in 3 months?
2) My wife doesn't work, therefore, no retirement plan. If I maximize my 401k contribution, and I want to maximize any IRA contribution (either for me or my wife) to reduce my AGI, how does de "phasing out" work?
I fill jointly.
My wife and I are currently making just over the limit for contributing to a roth IRA. She has the opportunity to invest in a 401 k. Would contributing to this 401k bring us under the max amount for Roth IRA contribution to allow us to continue to do this, or would we have to switch to a traditional IRA?
Thanks,
Jake.
Jake,
If your wife contributes enough to lower your AGI (and therefore MAGI) low enough you can absolutely contribute to a Roth IRA.
my current employer has a simple ira which i have maxed out at $14000.(I am over 50) I am changing jobs in November to a new company that has a 401k plan that i can contribute and get matching on day 1. they allow up to 50% of pay to be contributed so I can defer and get matching. I make about 15m per month in both jobs. (So i could defer $15m x2 x 50% at my new job to boost my retirment savings and reduce my taxes. Is this allowed.
IRA is tax defer vehicle for retirement account. I think that it is wrong based your article(The 401k is always tax deductible. That should be a staple of your retirement windfall (especially since most employers give matching contributions). The tricky part becomes the whether the IRA portion is tax deductible if you are contributing to a 401k. This is all dependent on your modified adjusted gross income (MAGI). It also changes depending on your filing status. If single and MAGI over $53,000 then the IRA is not deductible. After $53,000 the amount deducted is reduced until it is 0 at $63,000. If married filing jointly and you contribute to a 401k then that limit is increased to $85,000 which is then decreased up until it will be 0 at $105,000.)
If we have 401k, then what is the purpose to open an IRA account without tax defer benefit? We can have regular investment account instead. Are there any advantages or disadvantages to have both accounts at same time?
If I have an IRA account which is after tax, when we reach the legal age and take out the fund, how do we pay the tax since we already paid the tax when we put the fund to the account.
my wife make 70000 and i made 40000 this year. my wife saved 3000 in 401k, and employer matched 3000 dollars. can we both do IRA? or only me? i dont have 401k, since employer has not sponsored me.
I made aprox $151,000 gross in 2010 and contributed a full 16,500 into a company 401k. After the 401K funding, my adj GI for 2010 was approx $134,500. In 2009, I did not participate in the 401K but did fund 6,000 for myself (I'm over 50) and 5,000 for my wife in a ROTH IRA. My wife does not work outside the home, so we're a single income family. For 2010, even though I've paid 16,500 into the 401K, can I also fund an additional after tax 6,000 for myself and 5,000 for my wife into our existing ROTH IRAs prior to Apr 15? For 2011, I'd very much like to max out the 401K plus an additional 5,500 as catch up, and also contribute the maximum into our ROTH IRAs. Is all this allowable at our income level? What happens if I fund both, but it turns out that I don't qualify for the ROTH because we made too much? For the next 5 years or so, I really need to stuff as much into a retirement plan as I can... I'm way behind and need to catch up.
If I make $240,000 and my wife makes $0, and I max out my 401 (k) account, there is nowhere my wife can put money and get a tax benefit? Is this correct?
I have a quick question. I made 185k last year. I currently contribute to a 401k with no matching. I put in about 12,500 last year. I also have started a traditional ira and contributed to that last year. Am I ok to continue to have both and
contribute 16500 nd 5000 max e each year?
can you put your 401k in your spouses name alone?? is this actually possible and legal? my brother passed away in august, and we found out his wife's name was the only name listed on his 401k statement... how could that be?
I worked all year with a non union 401k retirement company. In December I limited my employment with this company and work at a union job with a pension. The part time status does not affect my 401k annual deposit but I am wondering if I am going to lose my annual 401k deposit in late January due to my union status at my other job?
I was severed in 2010. I did contract work and enjoyed severance during 2011. My 2011 W2 shows $600 in the ret plan and box 13c is checked. Since pub590 refers to being covered for "any" part of the year does that mean I am "covered"?
To clarify: The $600 was on the very first check of 2011. The payroll folks indicate that this was due to some split-date pay check paid in 2011. The contribution was based on 2010 earnings. So does the make me "covered" for 2011?
Go to Google- Type "Publication for IRA" then go to 'Limit if Covered by Employer plan.' Says married/jointly can take full Traditional IRA deduction if modified AGI is less than $90000.
I currently have a defined pension plan from my employer along with contributing 10% of income to a 401k plan through my employer ( no matching funds). The pension plan may be frozen and a new 401k plan with 5.5% matching may be in the future. I was thinking about changing from 10% down to 6% and taking the other 4% and starting a Roth IRA. Would this be a good decision? I am 50 years old.
Can I put $5000 in an IRA for my wife who is 58yrs old, and $6000 in an IRA for myself, who is 63yrs old? for the 2011 tax year.
I'm 57 years old. My wife is 60. Can I retire and tap into 401k accounts with out penalty?
Do we both have to be over 59.5? Can i put her name on the accounts and do it that way?
Mike 2 years ago
Question: I make over 53K/yr. If I were to stop my 401k contributions and transfer my account balance to an IRA, would I then be regarded as not participating in the 401k, with full tax-deductibility for my IRA contributions? It doesn't seem fair that someone should lose out on full tax-deductibility on IRA contributions simply because their company offers a lousy 401k that they don't want to use anymore.