Should You Have Both an IRA and a 401k?

Many people looking to maximize their retirement savings wonder if it’s a good idea to have both a 401(k) and an Individual Retirement Account (IRA). The Internal Revenue Service (IRS) permits you to contribute to both types of accounts simultaneously. Deciding if this is advisable depends on your personal financial situation, income, and retirement goals.

A 401(k) is tied to your employer, while an IRA is an account you open and manage on your own. They have different contribution limits, investment options, and rules that govern how and when you can access your money.

For many people, using both a 401(k) and an IRA in tandem is a powerful strategy to accelerate their savings. This approach allows them to take advantage of the unique benefits of each account type, which can increase the total amount you save each year and provide greater flexibility.

Features of a 401(k) Plan

A 401(k) plan is a retirement savings plan sponsored by an employer, allowing workers to save and invest a piece of their paycheck before taxes are taken out. Contributions are made directly through payroll deductions, which automates the process of saving.

A feature of many 401(k) plans is the employer match. This is when your employer contributes a certain amount to your account based on your own contributions. A common matching formula is a 50% match on employee contributions up to 6% of their salary. This is an immediate return on your investment and a primary reason to contribute to a 401(k).

The funds contributed by an employer are often subject to a vesting schedule, which determines when you have full ownership of the employer’s contributions. Common schedules include “cliff vesting,” where you become 100% vested after a specific period, such as three years, or “graded vesting,” where your ownership increases incrementally over several years. Once vested, the employer’s contributions are yours to keep, even if you leave the company.

The IRS sets annual limits on how much an employee can contribute to their 401(k). For 2025, the limit for employee salary deferrals is $23,500. Individuals aged 50 and over can make additional “catch-up” contributions. For 2025, this additional amount is $7,500, and a special rule allows those aged 60 to 63 to contribute a higher catch-up amount of $11,250. Some employers also offer a Roth 401(k) option, where you contribute after-tax dollars in exchange for tax-free withdrawals in retirement.

Features of an Individual Retirement Account (IRA)

An Individual Retirement Account, or IRA, is a retirement savings account that you open on your own, separate from any employer. This independence gives you a much broader array of investment choices compared to the limited menu offered in a 401(k) plan. With an IRA, you can invest in a wide variety of stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

There are two primary types of IRAs: the Traditional IRA and the Roth IRA. Contributions to a Traditional IRA may be tax-deductible in the year they are made, which lowers your taxable income for that year. Investments grow tax-deferred, but withdrawals in retirement are taxed as ordinary income.

Contributions to a Roth IRA are made with after-tax dollars, so there is no upfront tax deduction. The benefit of a Roth IRA is that your investments grow completely tax-free, and qualified withdrawals in retirement are also tax-free. Another feature of Roth IRAs is that you can withdraw your contributions—not the earnings—at any time, for any reason, without tax or penalty.

The IRS sets annual contribution limits for IRAs. For 2025, the maximum you can contribute to all of your IRAs combined is $7,000. A catch-up provision for those age 50 and older allows an additional contribution of $1,000. You have until the tax filing deadline of the following year to make contributions for the current tax year.

Contribution Rules When You Have Both

When you have access to a 401(k) at work and also want to contribute to an IRA, specific IRS rules come into play that can affect the tax benefits of your IRA contributions. These rules are based on your Modified Adjusted Gross Income (MAGI) and your tax filing status.

For a Traditional IRA, your ability to deduct contributions is phased out if your income exceeds certain levels and you are covered by a workplace retirement plan. For 2025, if you are a single filer covered by a 401(k), the deduction begins to phase out with a MAGI between $79,000 and $89,000. For those who are married and filing jointly, if the spouse making the IRA contribution is covered by a plan at work, the phase-out range is between $126,000 and $146,000. If you are not covered by a workplace plan but your spouse is, the phase-out range for your deduction is much higher, between $236,000 and $246,000.

The rules for contributing to a Roth IRA are different; they concern your eligibility to make a contribution in the first place. For 2025, a single filer’s ability to contribute to a Roth IRA is reduced if their MAGI is between $150,000 and $165,000, and they are ineligible to contribute if their MAGI exceeds $165,000. For married couples filing jointly, the income phase-out range is between $236,000 and $246,000.

These income limitations do not prevent you from contributing to a Traditional IRA; they only limit the tax deduction. You can make non-deductible contributions to a Traditional IRA regardless of your income.

Developing a Contribution Strategy

A common approach prioritizes contributions in a logical sequence to maximize benefits like employer matches and tax advantages. The first step for most people should be to contribute enough to their 401(k) to receive the full employer match. Failing to do so is like turning down free money from your employer.

After securing the full 401(k) match, the next step is to contribute to an IRA, up to the annual limit. The choice between a Roth or Traditional IRA will depend on your income eligibility and your outlook on future tax rates. The primary reason to shift to an IRA at this stage is the potential for greater investment choice and lower fees compared to your 401(k).

If you have maxed out your IRA contributions and still have funds available for retirement savings, the final step is to return to your 401(k). At this point, you would increase your payroll deductions to contribute as much as you can, up to the annual IRS limit of $23,500 for 2025, plus any applicable catch-up contributions.