Setting up an individual retirement account (IRA), and taking advantage of a 401(k) at work can be two important ways to start planning for your financial future.
But can you have both types of accounts at the same time?
The short answer is yes, you can have both an IRA and a 401(k), plus a version of both the IRA and the 401(k) called a Roth.
But some income limitation rules apply, the more accounts you have.
Read on and we’ll explain, so you can make the most of your retirement planning.
IRA vs. 401(k)
IRAs and 401Ks are both tax-advantaged retirement accounts that could help you save for retirement.
You typically have access to a 401(k) through an employer, who may also provide an employer-match benefit, whereas anyone can open an IRA by setting up an account at a bank or brokerage.
Both IRA’s and 401(k)s come in two flavors—traditional and Roth.
Traditional vs. Roth IRA
The difference between these two types of accounts has to do with when you put the money in your account. You fund a traditional account with pre-tax dollars—meaning dollars you earn before taxes are taken out; you then pay taxes on the money you take out of the account once you’ve reached retirement age.
In contrast, you fund a Roth with post-tax money, and then don’t pay taxes on the funds you withdraw in retirement.
Good to know: When you fund a traditional IRA using pre-tax dollars, you could potentially lower your tax rate.
What are the contribution limits?
For 2019, you can contribute $6,000 annually into any combination of IRA accounts. That means you can fund both a traditional IRA and a Roth IRA in the same year, as long as your total contribution limits for both accounts does not exceed $6,000.
In contrast, you can deposit up to $19,000 into a traditional or Roth 401(k) account in 2019.
If you’re 50 or older, you’re eligible to make catch-up contributions. For an IRA, you can put an additional $1,000 away annually. For a 401(k), you can put away an additional $6,000.
Pay attention to income limits
While you can fund both an IRA and 401(k) in the same year, some income limits could apply. Here are some of the main points.
Traditional IRA: If you’re eligible for a 401(k) or some other workplace retirement plan, you can also contribute to a traditional IRA. However, the tax deduction begins to phase out—or get smaller—if you earn between $64,000 and $74,000. And the tax deduction ends completely if your income is $74,000 or higher.
The phase-out also applies to married couples filing jointly, earning between $103,000 and $123,000, and deductions end for couples earning more than $123,000 annually.
Special note: Even if you and your spouse don’t contribute to a 401(k) for which you’re eligible, the same income limits for funding an IRA apply.
Roth IRA: You can also contribute to a Roth when you have a 401(k), but there are some limitations as well. Chiefly, when you earn $137,000 or more as a single tax filer, you can no longer contribute to a Roth. The same holds true for married couples, who can no longer contribute if their joint income is $203,000 or more.
Income limits do not apply to a 401(k). Generally speaking, if your workplace offers a retirement plan, you can fund the account to the maximum amount you’re allowed.
Note: This is not investment, legal or tax advice. For all tax related inquiries, please consult a tax professional.
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