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Can you contribute to a 401(k) and IRA? Yes + what to know

Both 401(k)s and IRAs are tax advantaged, but contributing to both might impact your eligibility for tax perks like IRA deductions. Learn more below to maximize your investment strategy.

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April 19, 2024

6 min. read

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Key takeaways:
  • Contributing to a 401(k) and  IRAs is not only possible, but a tax-smart investment strategy for your golden years. 
  • A 401(k) is an important foundational retirement account, but it’s not enough to fund most people’s retirement goals
  • Traditional accounts lower your current taxable income and grow tax-deferred, while Roth accounts grow tax-free.

In this article

      With the right know-how, you can use tax-advantaged accounts to optimize your retirement planning. Accounts like 401(k)s and IRAs can reduce your annual tax liability and boost your retirement fund. 

      A strong tax strategy can help you take advantage of tax benefits, but not everyone qualifies for every advantage. If you or your spouse are enrolled in a 401(k), your income might reduce or eliminate your ability to claim IRA tax deductions. 

      Both accounts have tax advantages, but a 401(k) is offered by your employer with some additional perks like higher contribution limits and employer-match potential. An IRA is independent of your job and you open it and fund it yourself. 

      Learn more about potential tax strategies, how these accounts work together, and whether you qualify for enrollment and tax advantages below. 

      IRA and 401(k) contribution limits

      Tax-advantaged retirement accounts, like 401(k)s and IRAs, are subject to contribution limits that restrict how much you can add to your accounts each year. 

      Contribution limits are important to know as you consider which accounts offer the most advantages for your retirement. This info will also help you strategize and budget for your annual contributions.

      Many experts recommend prioritizing your  401(k), if you have one available, because you can contribute up to $23,000 in 2024 (excluding catch-up contributions). This contribution is made on a pre-tax basis, which directly reduces your taxable income. Another potential benefit: many employers offer to match contributions up to an annual limit.  

      Like 401(k)s, contributions to traditional IRAs can reduce your current-year tax liability. 

      2024 Contribution limits
      Traditional 401(k)
    • $23,000 in pre-tax contributions
    • + $7,500 in catch-up contributions for those ages 50+
    • Roth 401(k)
    • $23,000 in after-tax contributions
    • + $7,500 in catch-up contributions for those ages 50+
    • Traditional IRA
    • $7,000 in pre-tax contributions across IRAs
    • + $1,000 in catch-up contribution for those ages 50+
    • Roth IRA
    • $7,000 in after-tax contributions across IRAs
    • + $1,000 in catch-up contribution for those ages 50+
    • The contribution limits for 401(k)s and IRAs are independent of each other. However, you can increase your Roth account contributions with a mega backdoor Roth. So you can move pretax 401(k) contributions into a Roth account to increase your annual Roth contribution limits – as high as $46,000 a year (excluding traditional 401(k) and catch-up contributions). 

      Income limits for IRA deductions

      IRAs are individual retirement accounts where you can contribute earned income (wages, salaries, tips). IRAs offer a tax deduction for your annual contributions to reduce your taxable income.

      Just like 401(k)s, you can have a Roth or traditional IRA. With a traditional account, you can earn a current tax break and tax-deferred growth. A Roth account gives you tax-deferred growth and tax-free retirement income. 

      However, contributing to a 401(k) might mean reduced IRA deductions, and depending on your modified adjusted gross income (MAGI), you might not meet eligibility requirements for any IRA deductions. 

      IRS rules are strict and get complex. These determine how much of a tax break you qualify for if you contribute to more than one tax-advantaged account. Generally, the more you make and the more you contribute, the less deductions you qualify for. 

      This restriction is effective if either you or your spouse contributes to an employer-sponsored 401(k). So even if you only have an IRA, your spouse’s 401(k) contributions might impact your tax deductions. 

       See how a 401(k) impacts your 2024 IRA deductions below.

      Filing status 2024 Income Permitted deduction for Traditional IRA
      Single or head of household Less than $77,000 Full deduction
      $77,000-$87,000 Partial deduction
      More than $87,001 No deduction
      Married filing jointly and you own a 401(k) Less than $123,000 Full deduction
      $123,000-$143,000 Partial deduction
      More than $143,001 No deduction
      Married filing jointly and your spouse owns a 401(k) Less than $230,000 Full deduction
      $230,000-$240,000 Partial deduction
      More than $240,00 No deduction
      Married filing separately Less than $10,000 Full deduction
      More than $10,00 Partial deduction

      If you qualify for a deduction, you can estimate the deduction based on your annual contribution and combined tax rate. 

      • Annual IRA contribution x combined tax rate = IRA tax deduction

      So if you contribute $7,000 to an IRA and have a 22% combined tax rate, your formula would be:

      • 7,000 x 0.22 = $1,540

      Your final result is a full IRA deduction, so compare your income to the deduction table above. If you only qualify for a partial deduction, you’ll want to consult a financial professional for an estimate.

      Image shows formula and example calculation to estimate an IRA full tax deduction.

      Tax liabilities

      While these accounts are tax-advantaged, you still have to pay taxes on your contributions one way or the other. However, it’s more about Roth vs. traditional accounts than 401(k)s vs. IRAs. 

      • Roth accounts: You contribute post-tax income and don’t pay taxes on returns and qualified distributions. 
      • Traditional accounts: You make pre-tax contributions and pay federal and state income taxes on qualified distributions. 

      Taxes for traditional IRAs might vary if you didn’t receive a full or partial tax deduction for your annual contributions. 

      Withdrawal guidelines

      Retirement accounts are designed to help you retire, so the IRS tries to limit early withdrawals before age 59.5 with guidelines, taxes, and penalties for unqualified distributions. 

      Withdrawal penalties
      Traditional 401(k)
    • 10% penalty on all early withdrawals.
    • Roth 401(k)
    • 10% penalty on all early withdrawals and before meeting the five-year rule.
    • Traditional IRA
    • 10% penalty on all early withdrawals.
    • Roth IRA
    • 10% penalty on all early withdrawals and before meeting the five-year rule.
    • The Department of Labor enforces penalties and taxes for early withdrawals that aren’t covered by qualified hardship distributions, 401(k) loans, or other early withdrawal exceptions.

      Some retirement accounts also have required minimum distributions (RMDs) that force you to begin making minimum annual withdrawals by age 72 (age 73 if you meet the milestone after 2022). 

      There are penalties if you don’t meet your RMDs each year. Rules can also vary for traditional 401(k) plans, so consult your provider to learn more. 

      401(k) vs. IRAs for your retirement plan

      Choosing between a 401(k) and IRA doesn’t have to be an either-or situation. In fact, maintaining both accounts can speed up your retirement savings and help you reduce your annual tax liability. 

      Graph shows how maximizing contributions across tax-advantaged accounts increases compound returns.

      Start with a 401(k), if your employer provides one. Employer-match contributions are one of a 401(k)s largest benefits, so maximize your matching contributions and enjoy free money for your retirement. 

      If you qualify for an IRA tax deduction, start contributing additional funds to a traditional IRA to reduce your tax liability.

      Otherwise, consider if Roth accounts are right for you. These are best if you expect your annual income to increase by the time you’re making withdrawals. This way you pay taxes now and enjoy tax-free distributions when you’re likely in a higher tax bracket. 

      If an IRA or Roth account doesn't make sense for your financial strategy, then stick with a 401(k) up to the annual $23,000 contribution limit. 

      The Playbook take: Mix-and-match tax-advantaged accounts for optimized savings

      Contributing to multiple tax-advantaged accounts can significantly reduce your tax bill each year. When you understand how these accounts work together, you can strategize to defer taxes with traditional accounts, enjoy tax-free growth with Roths, and collect tax deductions with traditional IRA contributions. 

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      About the author

      Theo Katsoulis, CFA

      Head of Investments

      Theo brings an extensive background in Institutional Asset Management. With a B.A. from Villanova University's School of Business, and having passed the rigorous Series 65 and CFA examinations, he brings significant expertise from portfolio management to understanding intricate financial infrastructures. As Head of Investments at Playbook, he ensures consumers receive exceptional diligence and care for their investment portfolios.

      Tanza Loudenback, CFP®

      Editor

      Tanza is a CFP® certificant, writer, and editor. From 2015 to 2021, she was a top-read author and editor at Insider. Her work focuses on helping people make smart decisions with their money and is published by a variety of online publications.

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