Can You Invest In Both An IRA And 401k At The Same Time?

Grow And Maximize Your Nest Egg With Tax-Advantaged Accounts

Grow And Maximize Your Nest Egg With Tax-Advantaged Accounts

When researching avenues to grow your wealth for retirement, chances are you have found IRAs and 401ks in your research.

Both offer excellent tax incentives, but you may be wondering if you can invest in both an IRA and 401k.

401k Plans

It is a good idea to participate in your company’s 401k plan. The funds that are invested in a 401k are not subject to tax. All contributions are pre-tax dollars, meaning that the taxpayer doesn’t pay taxes on what is contributed to the plan.

This also means that the income contributed doesn’t count against the limits placed on credits and deductions that have phase-outs based on income.

This includes some tax credits for children, as well as deductions for student loan interest. It can be a huge savings come tax time to lower your income this way.

IRAs

It is also a great idea to invest in an IRA. Funds contributed to a traditional IRA are a tax deduction for many people.

Funds invested in a traditional IRA grow tax-deferred, even if your income is too high to deduct your contributions. Another option to consider, provided you meet the income requirements, is a Roth IRA.

Can You Invest In Both A 401k And An IRA In The Same Year?

It is permitted to invest in both a 401k and IRA in the same year as long as you are within the maximum allowable contributions. There are contribution maximums for both types of accounts, but the numbers are not related to each other.

As an investor, you can make the allowable contributions to both your 401k and IRA with no tax penalty. It is not only allowable to contribute to both a 401k and an IRA, but recommended if you have the capital to do it.

When investing in both types of accounts, it is advised that you contribute to your 401k up to your employer match, and then direct additional capital toward your IRA up to the maximum allowable contribution.

One caution is that the contribution limit placed on a Roth IRA is not a separate amount from the contribution limit placed on a traditional IRA. In 2009, the maximum amount allowed for contribution to an IRA account was $5,000, with anyone over the age of 50 allowed to make a catch up contribution.

The $5,000 limit is the total collective contribution limitation for all IRA accounts, no matter what type. An investor can only contribute a total of $5,000 to either a Roth IRA account or a traditional IRA.

You can split the maximum contribution between IRA accounts, but keep in mind that the total can not be greater than the annual limit. An investor may contribute $4,000 to a Roth Ira and $1,000 to a traditional IRA but not $4,000 each.

That very same investor may contribute the maximum annual contribution to their 401k, in addition to maximizing their contributions to their IRA.

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