Learn how to navigate contributing to both a 401k and an IRA. Understand the benefits, limits, and rules. Read more to optimize your retirement savings.
Looking to maximize your retirement savings potential? Good news—you can contribute to both a 401(k) and an IRA simultaneously, creating a powerful combination for your financial future.
This dual-account strategy offers significant advantages including additional tax benefits, expanded investment options, and higher total contribution limits than using either account alone.
This guide explains how to coordinate these complementary retirement vehicles to potentially accelerate your savings and create more financial security for your retirement years.
Double-dipping into retirement accounts offers substantial benefits. When you put money into an employer-sponsored retirement plan like a 401(k) and also contribute to an individual retirement account (IRA), you can max out your limits and make the most of their tax advantages.
Doing this helps you build your retirement savings faster and allows you to diversify your savings portfolio. You just need to follow the contribution limits and rules for each account.
The annual contribution limits for 401(k) and IRA differ between 2024 and 2025. Individuals aged 50 and older are eligible for catch-up contributions under specific guidelines.
Smart retirement planning hinges on understanding your contribution ceiling. Let's check out what the limits look like for 2024 and 2025.
As you can see, the 401(k) contribution limit will increase slightly in 2025, while the IRA contribution limit will remain the same. Plan your savings with these figures in mind.
For individuals aged 50 and older, making catch-up contributions to retirement accounts is a smart way to boost savings. Here's a look at those limits:
This table shows that for 2024 and 2025, individuals 50 and older can contribute an additional $7,500 to their 401(k) on top of the standard limit. For IRAs, the catch-up limit remains an extra $1,000.
Starting in 2025, however, a higher catch-up contribution cap is available for workers who are 60, 61, 62, and 63 years old, according to the SECURE 2.0 Act. For this group, the limit will rise to $11,250 in 2025.
Maxing out these contributions can allow for a more substantial nest egg, securing a more comfortable retirement.
Let's look at the income limits for traditional and Roth IRAs, as well as employer-sponsored 401(k) eligibility.
When considering your retirement planning, knowing the income limits for traditional and Roth IRAs is crucial. Here's a guide for the phase-out ranges:
For Roth IRAs, your ability to contribute starts to decrease as your income reaches the lower range and phases out entirely at the upper limit. Below the lower end of this range, you can contribute the full allowed amount. Once your income enters the phase-out range, the amount you can contribute decreases proportionally.
For example, if you're a single filer in 2024 with an income of $153,500 (exactly halfway through the $146,000-$161,000 phase-out range), you can contribute approximately 50% of the maximum contribution amount, or about $3,500 instead of the full $7,000. The formula used is:
Maximum Contribution × [1 - (Your MAGI - Lower Limit) ÷ (Upper Limit - Lower Limit)]
If your income reaches or exceeds the upper limit, you cannot contribute to a Roth IRA at all.
For traditional IRAs, you can contribute up to the maximum no matter your income. However, for those who are also covered by a workplace retirement plan like a 401(k), your ability to deduct those contributions on your taxes is affected. If your income falls within the phase-out range, the deductible portion decreases proportionally using a similar formula:
Maximum Deduction × [1 - (Your MAGI - Lower Limit) ÷ (Upper Limit - Lower Limit)]
For example, if you're married filing jointly in 2024 with an income of $126,000 (halfway through the $116,000-$136,000 phase-out range), you can deduct approximately 50% of your traditional IRA contribution. If your income exceeds the phase-out limit, you can still contribute, but your contribution is not tax-deductible at all.
Those earning above these limits can explore other saving strategies for retirement.
To contribute to an employer-sponsored 401(k), employees typically must be at least 21 years old and have completed one year of service.
However, under the SECURE 2.0 Act, as of 2024, employees who work part-time for at least 500 hours annually for three consecutive years must also be allowed to contribute. Starting in 2025, this requirement is reduced to two consecutive years.
Additionally, some employers may offer immediate eligibility for new employees, and specific plan rules regarding service requirements may vary.
When you roll over a 401(k) to a Roth IRA, be prepared to pay taxes on the pre-tax contributions. This also means understanding how your taxable income may change as a result of the rollover.
The tax bill comes due when moving money to a Roth IRA. These taxes will be calculated based on your current income tax rate.
Essentially, this means you'll need to include the converted amount as taxable income when filing your income tax return for the year of conversion. Consulting a tax advisor can help manage these complexities and ensure that you accurately account for any tax implications.
Understanding these tax consequences is crucial before proceeding with a rollover process. It's important to recognize that immediate taxes apply when converting pre-tax funds into a Roth IRA, potentially affecting your overall financial situation significantly.
The conversion of pre-tax 401(k) contributions to a Roth IRA increases your annual taxable income, potentially affecting your tax bracket, eligibility for certain tax credits or deductions (such as the Child Tax Credit or education credits), Medicare Part B and D premiums (due to increased Modified Adjusted Gross Income), and taxation of Social Security benefits.
Keep these factors in mind to make informed decisions about your retirement savings.
Maximize savings by spreading your contributions across both 401(k) and IRA, ensuring you take full advantage of employer matching and tax benefits. Diversify your retirement portfolio for a balanced investment approach, leveraging the potential growth opportunities offered by both accounts.
Spreading investments across various assets creates resilience in your retirement strategy. Consider investing in a mix of assets such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs) through both your 401(k) and IRA accounts.
Mutual funds offer professional management and instant diversification across multiple securities, while ETFs combine the diversification benefits of mutual funds with the trading flexibility of individual stocks, often with lower expense ratios. By spreading your investments across these different asset classes and investment vehicles, you can potentially reduce the overall risk of your portfolio while maximizing potential returns over time.
Diversification also helps to ensure that if one investment under-performs, it doesn't significantly impact your overall retirement savings. For example, you could allocate a percentage of contributions to growth-oriented stock funds for long-term potential, another portion to bond funds for stability and income generation, and include index ETFs for broad market exposure with typically lower fees.
Moreover, including employer matching contributions into your 401(k) plan is crucial for optimizing retirement savings. These matched funds provide an instant return on investment and can substantially enhance the growth of your retirement nest egg over time.
Taking advantage of these matching contributions involves contributing enough to receive the full match offered by your employer – this effectively provides additional funds towards securing a more financially stable retirement.
Free money awaits those who tap into employer-matching programs. Many employers offer to match a portion of the money you put into your 401(k) plan, up to a certain percentage of your salary.
For example, if an employer matches dollar-for-dollar up to 3% of an employee's salary and that employee earns $50,000 per year, the employer will contribute $1,500 if the employee saves at least $1,500 in their 401(k).
This essentially doubles the amount contributed by the employee.
By taking advantage of this benefit, you can accelerate your retirement savings without increasing your own contributions. It's essentially free money from your employer that can make a substantial difference in building a comfortable nest egg for retirement.
Investing strategically in both 401(k) and IRA accounts creates a powerful retirement acceleration strategy few savers fully leverage. Understanding contribution limits and tax advantages unlocks a wealth-building approach that could significantly impact your financial future.
Don't leave money on the table! Capturing employer matching contributions while building your IRA creates tax diversification and provides both immediate benefits and long-term flexibility. This dual-account approach could represent years of additional financial security in retirement.
Yes, you can contribute to both a 401(k) and an IRA, provided you meet the IRS eligibility requirements for each type of account.
For 2024 and 2025, the annual IRA contribution limit is $7,000. If you're age 50 or older, you can contribute an additional $1,000 catch-up contribution, bringing the total allowable contribution to $8,000 per year.
Your ability to contribute to a traditional or Roth IRA may be limited based on your modified adjusted gross income (MAGI) and whether you participate in a workplace retirement plan. Higher income can phase out eligibility for Roth IRA contributions or deductible traditional IRA contributions.
Yes. As long as you have earned income, you can contribute to both traditional and Roth IRAs at any age. The previous age restriction of 70½ for traditional IRA contributions has been eliminated.
Contributions to a traditional IRA may reduce your taxable income, subject to eligibility based on income limits and coverage by a workplace retirement plan. Roth IRA contributions, however, are made with after-tax dollars and do not reduce your current taxable income, though qualified withdrawals in retirement are tax-free.
Diversifying contributions between 401(k)s and IRAs provides flexibility in managing taxes both now and in retirement, helps you take advantage of employer matching contributions, and optimizes your long-term financial planning.
