Can You Have Both an IRA and 401(k)?

If you have earned income, you can sock money away in both an IRA and a 401(k). Here are some of the key facts, differences, and reasons why you might opt for both an IRA and a 401(k):

401(k)

Contributions are funded with pre-tax dollars, which means you save on taxes now but will be taxed when you withdraw the funds during retirement. With a 401(k), you can contribute up to $23,000 in 2024, or if you’re 50 and over, $30,500. If you’re an employer, you may be offering to match a portion of those contributions.

With a 401(k), your investment options might be limited to stocks, bonds, and other traditional choices.

For self-employed people, the self-directed solo 401(k) is an attractive option. If you qualify, this plan offers higher contribution amounts and possible tax deductions. The key here is the employer match contribution. Here’s how it works.

Two components comprise the maximum Individual 401(k) plan contribution:

• An employee salary-deferral contribution — not to exceed 100% of the employee’s pay. The employee can contribute up to $23,000 annually through salary deferral in 2024.
• An employer profit-sharing contribution — The annual limit for this is 25% of the employee’s pay (20% for a self-employed person).

The total annual contribution limit from both sources, for those under age 50, is $69,000 in 2024. Under a “catch-up” provision, individuals age 50 or over may contribute up to $30,500 allowing for a total contribution limit of $76,500.

[Read more about the Self-Directed Solo 401(k)]

IRA

Traditional IRAs too are funded with pre-tax dollars, and your earnings are tax-free until you withdraw funds during retirement. The contribution and tax deduction limits vary depending on which type of IRA you choose and your income. Refer to the Contribution Limit Guide for a clear picture of how much you can contribute and how much you can deduct.

When you’re talking about a self-directed IRA, you have an array of investment options, including real estate, promissory notes or lending, private equity, precious metals, cryptocurrency, trading accounts and foreign currency, tax liens and deeds, and a wide range of other investment opportunities.

Roth IRAs and 401(k)s

With Roth IRAs and 401(k)s, you contribute with after-tax funds. That means you’re paying the tax upfront. Your earnings grow tax-free until you reach retirement, and you are not taxed on the distributions you take from the account.

If you already have a 401(k) and have been making regular contributions, opening a Roth account is a potential way to supplement that because you’re maximizing both your contributions with two accounts and your tax advantages.

In a traditional 401(k) or IRA, you’re paying the tax on the back end, when you withdraw the funds during retirement. You’ve saved those taxes on the front end.

A Roth 401(k) and IRA are designed to be just the opposite. You’re paying taxes on that money before it goes into the Roth, but you won’t pay taxes on the back end, when it comes out. Roth accounts are primarily used as retirement accounts, but people also use them as a way to save for other events, like a child’s college education, without dipping into your retirement savings.

Another difference between Roth and traditional retirement accounts is the disbursement requirements. Some traditional accounts require you to start taking money out of the account when you reach 72 years old. With a Roth account, there is no age disbursement requirement.

Bottom line, one big advantage to having multiple accounts is to maximize your tax savings. Remember, with a Roth account, you’re taxed on the front end and enjoy tax-free disbursements when you retire.

We get it, all of this can be confusing. Contact us, and we can help sort out the options so you and your financial advisor can choose a solution that’s right for you.