Can I Have a Traditional IRA and a 401k at the Same Time?

Balancing retirement savings options is essential for securing a comfortable future. Many individuals wonder if they can contribute to both a Traditional IRA and a 401k, two popular retirement accounts with distinct features. Understanding how these accounts interact can help maximize tax advantages and savings potential.

Eligibility for Traditional IRA and 401k

Eligibility for a Traditional IRA depends on having earned income. If you or your spouse have taxable compensation, you can contribute. Individuals aged 50 and older can make catch-up contributions to save more as they approach retirement.

Eligibility for a 401k is determined by your employer, as these are employer-sponsored plans. Most employers offer 401k plans to full-time employees, and some extend this benefit to part-time workers who meet specific criteria. Starting in 2024, the SECURE Act 2.0 requires long-term part-time employees who have worked at least 500 hours annually for three consecutive years to be eligible for 401k participation, broadening access to these plans.

Combined Contribution Limits

For 2024, the IRS sets the 401k contribution limit at $23,000, with an additional $7,500 catch-up contribution for individuals aged 50 and older, allowing them to contribute up to $30,500 annually.

The contribution limit for a Traditional IRA in 2024 is $7,000, with a $1,000 catch-up provision for those aged 50 and older, bringing the total to $8,000. These limits apply separately, meaning you can contribute the maximum to both a 401k and a Traditional IRA in the same year, significantly boosting retirement savings.

Deductibility and Coverage Rules

For those not covered by a workplace retirement plan, the IRS allows full deductibility of Traditional IRA contributions regardless of income. However, if you or your spouse are covered by a plan like a 401k, deductibility may be limited based on modified adjusted gross income (MAGI) and filing status.

In 2024, single filers with a MAGI of $73,000 or less can fully deduct IRA contributions, with deductions phasing out between $73,000 and $83,000. For married couples filing jointly, the phase-out range is $116,000 to $136,000 if the contributing spouse is covered by a workplace plan. If only the spouse is covered, the phase-out occurs between $218,000 and $228,000. Exceeding these thresholds results in non-deductible contributions, reducing tax efficiency.

Penalties and Distribution Requirements

Distributions from Traditional IRAs and 401k plans generally cannot begin before age 59½ without incurring a 10% early withdrawal penalty, though exceptions exist for first-time home purchases, qualified education expenses, or substantial medical costs.

The SECURE Act raised the Required Minimum Distribution (RMD) age to 73 starting in 2023. Account holders must take RMDs by December 31 each year or face a penalty—50% of the amount that should have been withdrawn.

Ownership and Beneficiary Considerations

Ownership and beneficiary designations are critical for effective estate planning. Both Traditional IRAs and 401k plans are individually owned, giving account holders control over contributions, investments, and distributions during their lifetime. Upon the account holder’s death, beneficiary designations determine how assets are transferred.

Beneficiary designations override wills or trusts. Account holders can name primary and contingent beneficiaries. The SECURE Act changed distribution rules for inherited retirement accounts, requiring most non-spouse beneficiaries to withdraw the entire balance within 10 years of the original account holder’s death. Spousal beneficiaries retain more flexibility, including rolling inherited funds into their own IRA.

If no beneficiary is named, the account defaults to the estate, leading to less favorable tax treatment and potential probate complications. Regularly updating beneficiary designations, especially after major life events like marriage, divorce, or the birth of a child, ensures assets are distributed according to the account holder’s wishes.