Are you looking for ways to save for retirement? If so, a 401(k) and an IRA can both be valuable tools to put away tax-advantaged funds for your future. But can you have both? The answer is yes! While there are limits and income restrictions to consider, it’s possible to contribute to both a 401(k) and an IRA (traditional and Roth) in the same tax year. In this article, we’ll delve deeper into what you need to know about saving in a 401(k) and IRA simultaneously to make the most of your retirement savings.
How a 401(k) works
A 401(k) is an employer-sponsored retirement plan that allows you to contribute a percentage or fixed amount from each paycheck. It’s worth noting that some employers even match a portion of your contributions, essentially giving you free money. While 401(k) plans may have limited investment options and higher fees compared to IRAs, the tax advantage and potential employer match make it a worthy choice for many savers.
By default, contributions to a 401(k) are made with pre-tax dollars, meaning you don’t pay taxes on the money you contribute until you withdraw it in retirement. Additionally, there are contribution limits and required minimum distributions (RMDs) to consider. For example, in 2023, the contribution limit is $22,500, with an additional catch-up contribution of $7,500 for those aged 50 or older.
How an IRA works
An IRA, or Individual Retirement Account, is a personal retirement account that you can open and maintain at any financial institution of your choice. IRAs offer a wide range of investment options and can be either traditional or Roth. With a traditional IRA, contributions are made with pre-tax dollars, and withdrawals are taxed in retirement. On the other hand, a Roth IRA uses after-tax dollars for contributions, and qualified withdrawals are tax-free.
It’s important to note that you can contribute to an IRA even if you don’t have a 401(k), as long as you have earned income. For the year 2023, the contribution limit for an IRA is $6,500, with an additional catch-up contribution of $7,500 for individuals aged 50 or older.
Benefits of contributing to both a 401(k) and an IRA
Maximizing your retirement savings involves taking advantage of both a 401(k) and an IRA. Here’s a suggested approach:
- Take advantage of the full employer 401(k) match: Make sure you contribute enough to receive the full employer match. Missing out on this match is like leaving money on the table.
- Max out IRA contributions: If eligible, contribute to a Roth IRA to build up tax-free savings for retirement.
- Invest more in your 401(k) if possible: If you have the means, contribute more to your 401(k) until you reach the annual limit.
By following this strategy, you can make the most of the tax advantages offered by both accounts and potentially increase your overall retirement savings.
How to invest with both account types
Setting up contributions to both a 401(k) and an IRA is a relatively straightforward process. For your 401(k), you can generally set up contributions through your employer’s website. As for an IRA, you’ll need to choose a financial institution and open an account. Once your accounts are set up, you can contribute automatically through paycheck deductions or bank transfers.
It’s important to note that if you have old 401(k) accounts from previous employers, it may be beneficial to roll them into an IRA to avoid fees and gain more investment choices.
Conclusion
In summary, you can have both a 401(k) and an IRA, and contribute to both in the same tax year. By taking advantage of the tax advantages and potential employer match offered by a 401(k), as well as the flexibility and investment options provided by an IRA, you can maximize your retirement savings. Remember to prioritize contributions based on employer matches and contribution limits, and consider consolidating old 401(k) accounts into an IRA for better control over your investments. Happy saving!
[IRA]: Individual Retirement Account
[RMD]: Required Minimum Distribution