Can You Open an IRA If You Have a 401k?

Individuals often wonder if they can contribute to both a 401(k) and an Individual Retirement Account (IRA) concurrently. Many participate in employer-sponsored retirement plans like a 401(k) but also seek to maximize personal retirement savings. In most cases, individuals can contribute to both types of accounts. This dual approach can provide increased flexibility and potentially greater savings growth.

Holding Both a 401(k) and an IRA

Maintaining both an employer-sponsored 401(k) and a personal IRA is often a beneficial strategy for retirement planning. Individuals frequently choose this path to complement workplace savings with additional investment opportunities. A 401(k) offers convenience through payroll deductions and may include employer matching contributions. However, investment choices within a 401(k) might be limited to funds chosen by the plan administrator.

An IRA provides a broader universe of investment options, allowing greater control over asset allocation and security selection. This can include individual stocks, bonds, exchange-traded funds (ETFs), and a wider array of mutual funds. Diversifying retirement savings across different account types and investment vehicles enhances overall portfolio resilience. Having both accounts also offers flexibility for future financial planning, such as potential rollovers or managing funds more directly after leaving an employer.

Navigating Contribution Rules and Tax Implications

When contributing to both a 401(k) and an IRA, understanding contribution limits and tax implications is important. For 2024, the maximum total contribution to all Traditional and Roth IRAs combined is $7,000, or $8,000 if aged 50 or older, provided earned income equals the contribution. These limits apply across all IRAs an individual holds, regardless of 401(k) participation.

The deductibility of Traditional IRA contributions is affected by participation in an employer-sponsored retirement plan like a 401(k) and an individual’s Modified Adjusted Gross Income (MAGI). For 2024, if a single filer is covered by a workplace plan, the deduction phases out with a MAGI over $77,000 and is eliminated at $87,000. For married individuals filing jointly where both spouses are covered, the phase-out range is a MAGI between $123,000 and $143,000. If one spouse is covered but the other is not, the non-covered spouse’s Traditional IRA deduction phases out with a MAGI between $230,000 and $240,000.

Eligibility to contribute directly to a Roth IRA also depends on MAGI, irrespective of 401(k) participation. For 2024, single filers can make a full Roth IRA contribution if their MAGI is less than $146,000, with contributions phasing out at higher income levels. Married individuals filing jointly can make a full Roth IRA contribution if their MAGI is less than $230,000, with contributions phasing out at higher income levels.

Traditional IRA contributions are made with pre-tax dollars, if deductible, leading to tax-deferred growth. Withdrawals in retirement are taxed as ordinary income. Roth IRA contributions are made with after-tax dollars, allowing for tax-free growth and tax-free qualified withdrawals in retirement. Both Traditional IRAs and 401(k)s are subject to Required Minimum Distributions (RMDs), generally starting at age 73 for those reaching that age in 2023 or later. Roth IRAs do not require distributions during the original owner’s lifetime.

Opening an IRA and Managing Your Accounts

When opening an IRA in addition to a 401(k), a primary decision involves choosing between a Traditional and a Roth IRA. This choice often hinges on an individual’s current income level and expectations for future tax rates. If an individual anticipates being in a lower tax bracket in retirement, a Traditional IRA with its potential upfront tax deduction might be more advantageous. Conversely, if future tax rates are expected to be higher, a Roth IRA, with its tax-free withdrawals, could be more beneficial.

To open an IRA, individuals need basic personal information, including their Social Security number, date of birth, and contact details. They also need bank account information to fund the account initially. The process begins by selecting a financial institution, such as a brokerage firm, mutual fund company, or bank, that offers IRA accounts. These institutions provide a platform for account setup and investment management.

Once a financial institution is chosen, the process involves completing an online application or paper forms. After the account is established, funds can be transferred electronically from a bank account or by check. Individuals then select investments from the options provided, aligning them with financial goals and risk tolerance. Managing both a 401(k) and an IRA involves periodically reviewing overall asset allocation to ensure consistency with long-term objectives, including rebalancing investments across both accounts as market conditions change. Individuals may also consider rolling over old 401(k)s from previous employers into an IRA, which can simplify account management and expand investment choices.