Can I Have a 401(k) and an IRA?

September 8, 2020

It is certainly possible to contribute to a 401(k) as well as an IRA at the same time. This is a common practice in America. These two retirement plans share some similarities. One of the similarities is that they both allow for tax-deferred savings. In the case of Roth 401(k) and Roth IRA, you can benefit from tax-free earnings. If you currently contribute to a 401(k) at work, once you meet certain requirements of the IRA, you can contribute to it as well.


Pros and Cons of a 401(k)

There are a lot of companies that offer 401(k) retirement plans. An attractive feature of these plans is that they have a large contribution limit. The cap for contributions in a 401(k) plan is $19,500. Another great opportunity that comes with 401(k) plans is that employers can match the contributions of their employees. This is pretty much free money. It would be a great idea to maximize your 401(k). when you retire, you will have access to what you contributed plus the contributions of your employer.

A drawback of 401(k) plans is that the investment options available to contributors are traditionally limited. In recent times, companies have made more investment options available to their workers. Nonetheless, many plans are still hindered by a limited number of options.


Pros and Cons of an IRA

This retirement plan opens a great range of investment choices to contributors. This is one of the things that make IRAs more attractive. Within an IRA, you can invest in stocks, bonds, mutual funds, ETFs among many other options. This makes finding a great option that is secure yet lucrative simple.

A drawback of IRAs is that the contribution cap is low. In the year 2020, the largest amount that an individual can contribute is $6,000 annually. If you are 50 years or older, you will be permitted to contribute $7,000.


Conditions and Benefits of Having Both an IRA and 401(k) Plan

As you might already suspect, there are some limitations that you may face when you have both. If you are already contributing to a 401(k) plan offered by your employer, or your wife/husband has a 401(k) plan, your contribution to a typical IRA may not be tax-deductible.

There are income limits that are considered when determining if you are eligible to deduct your contributions to a traditional IRA. If you are eligible for the tax deductions of an IRA plan while contributing to a 401(k) plan, you will be able to benefit from low-cost investments. In addition to that, you will also face no administrative fees.

The main objective of contributing to both is to maximize your opportunity to save.

Rahul Iyer

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