Can You Contribute to a 401(k) and an IRA?

Can you contribute to 401(k) and IRA? Yes, you can contribute to a 401(k) and an IRA or Individual Retirement Account. In fact, many people have both.  Here’s some more information about 401(k)s and IRAs. Two important building blocks for growing your retirement savings.

401(k)s

A 401(k) is a work-sponsored retirement program that allows employees to transfer a pre-tax percentage of their paycheck to the plan every month. That way, they can earn additional interest on their funds.

Related reading: What is a 401(k) and how does it work?

Some companies will match your contributions up to a certain amount, giving you free money as an incentive to save for your retirement. You may want to contribute the maximum amount that your employer will match to take full advantage of your 401(k). For example, your company could match 50% of your contributions up to 3% of your salary. If you put 6% of your salary into your 401(k), you’ll get an extra 3% from your employer for a total of 9% of your salary.

However, some businesses have a vesting period, an amount of time you must work for the company before you own the contributions that the firm has made to your account.

Keep in mind that there are two types of 401(k)s: traditional and Roth. While a traditional 401(k) is more commonly pre-tax, a Roth 401(k) is when contributions are post-tax, so you won’t need to pay taxes on any interest you earn or on withdrawals. Both types of 401(k)s have no modified adjusted gross income (MAGI) limits, so as long as your employer offers them, you can use them no matter how much money you make. However, some 401(k) plans only provide limited investment options, so make sure to find a 401(k) plan that has more choices, options that align with your retirement goals, and can let you choose the investments you want.

IRAs 

With a traditional IRA, you can buy bonds, stocks, mutual funds, or other investments from any provider you choose — all pre-tax. You can also get help from a financial advisor to find low-cost, high-yield investments. Just like with a 401(k), you get a tax benefit for contributions for your retirement when you file your tax return. However, you’ll need to pay taxes on withdrawals when you retire. Like Roth 401(k)s, Roth IRA contributions come from post-tax income. You can use the funds in a Roth IRA after you turn 59 1/2 and you have the account for five years with no taxes or penalties. Roth IRA withdrawals are also penalty-free for people who use the money to pay for a new home, medical expenses, or their child’s college education.  

How Much Can You Contribute to a 401(k) and an IRA?

To maximize your savings, you may want to contribute the annual limit for each account. However, depending on your modified adjusted gross income (MAGI) and whether your spouse has a retirement plan through their employer, you may not be able to deduct contributions to your traditional IRA when you file your taxes. Also, investing in a 401(k) account could lower the amount that you can deduct or disallow deductions for putting money in your IRA.

The IRS limits investments in traditional and Roth IRAs. For 2024, you can invest $7,000 per year if you’re below 50 or $8,000 per year if you’re 50 or older. You must have income to contribute to an IRA, but you can double your contribution limit by investing in a spousal IRA for a nonworking spouse along with your own IRA.

If you earn more than a certain MAGI, your Roth IRA contribution limit could be lower, or you may not be able to invest anything. With a traditional IRA, you can always contribute the full amount until you turn 72 years old, but deductions could be limited. Your income tax filing status is important as well.

If you’re married and filing jointly or a qualified widow or widower and you have a MAGI less than $196,000, you can deposit the contribution limit. If you earn between $196,000 and $206,000, you can contribute a lower amount. However, people who make $206,000 or more can’t invest at all in a Roth IRA.

There are no income restrictions when it comes to contributing to a 401(k). And, the IRS has a much higher contribution limit for 401(k)s compared to IRAs. In 2024, the contribution limit is $23,000 if you’re under age 50. It’s $30,500 if you’re 50 or older. If you accidentally put too much into your 401(k) or IRA, the IRS requires you to remove the excess funds by April 15 of the following year. If you miss that deadline, you may want to consult a CPA to calculate the amount you owe in taxes.

Potential Penalties and Required Minimum Distributions on Retirement Plans

In some circumstances, e.g. if you take withdrawals before retirement, you may need to pay a penalty. With traditional IRAs and 401(k)s, there’s a 10% penalty for withdrawals made before you get to age 59 1/2. However, you may not have to pay the penalty in some situations, e.g. in the case of financial hardship such as high medical bills. Remember that, for Roth IRAs, the same penalty applies for withdrawals from your earnings, unless you meet the two requirements:

1. You’ve held your Roth IRA account for at least five years.

2. You’re at least 59 1/2 years old, disabled, or using up to $10,000 toward a first-home purchase.

However, you can withdraw your contributions from your Roth IRA anytime with no taxes or penalties. 

Traditional IRAs require people to start taking Required Minimum Distributions (RMDs) by age 72, but Roth IRAs don’t have RMDs. Traditional and Roth 401(k)s require you to start taking RMDs by 72 only if you’re retired. If you decide to keep working, you can let your investments continue to grow. If you don’t comply with these rules, you could face a 50% penalty on withdrawals from the IRS.

With either a 401(k) or an IRA, you can save with pre-tax and after-tax dollars to increase your funds as fast as possible. Human Interest helps small businesses offer full-service 401(k)s with low fees to their employees. Our experienced account supervisors can give company managers and their workers an easy, less stressful experience. A great 401(k) can help you attract the best employees and increase retention. Contact us for additional information about the investment options available.