Can You Invest in Both an IRA and a 401k

Those who are really serious about preparing for retirement will want to look at all the investment vehicles at their disposal for this purpose. The 401k is an investment product set up through an employer that allows employees of the company to put money aside in a tax-deferred investment plan. The individual retirement account (IRA), in contrast, is an investment vehicle used by the individual to save for retirement through a variety of accounts and investments.

While many contribute to one or the other, can you invest in both an IRA and a 401k at the same time? We will cover IRA and 401k plan rules to help you make the most of your retirement savings.

Benefits of a 401k


The 401k is often the best solution for a retirement investment because the employer often matches the contributions the employee puts into his retirement account – up to a particular limit that is determined by each individual employer. These matching contributions are the closest thing you can get to free money in preparing for your retirement years.

The 401k rules also allow for larger contributions into these accounts each year than you can make to the standard IRA.

For these reasons, most financial experts recommend following 401k plan rules first and foremost, and only considering a supplemental IRA contribution if you have enough disposable income to accommodate for both.

Adding an IRA Contribution


For those that have enough additional income to make an IRA contribution as well, this process is allowed by employers and the federal government. IRA contributions are also limited each year, depending on how much earned income you have and how old you are. Even if you have more than one IRA, you must adhere to the annual IRA contribution limits for all of your accounts, splitting the maximum up between your various investment products.

The good news is that the IRA and 401k plan rules do not overlap in the eyes of the federal government. You can make the full amount of your IRA contribution and the full amount of your 401k contribution in the same year. This greatly increases the amount of tax-deferred money you can put away for retirement.

Roth IRAs


When you are investing in both an IRA and a 401k, it might be worth considering a Roth IRA over a traditional retirement account. These IRAs do not offer the tax-deferred benefits up front; instead, IRA contributions are subject to tax, and the eventual distributions are tax-free.

The advantage to combining a Roth IRA with a 401k plan is that you diversify your retirement income, with some that is subject to income tax and some that is not. This approach might keep you in a lower tax bracket during your retirement years, so you end up pocketing more of your own money rather than sending it to Uncle Sam.

Current law does allow investors to invest in both an IRA and a 401k, according to IRA contribution and 401k plan rules. When you have enough to invest the full potential into your retirement accounts, you can rest assured you will be well cared for during the later years of life.
Tim Ord
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