Should You Have Both an IRA and a 401(k)?

The 401(k) and Individual Retirement Arrangement (IRA) are two widely utilized options for retirement savings. Both offer distinct advantages that can complement each other, helping individuals accumulate wealth over their working careers.

Exploring 401(k) Accounts

A 401(k) is a retirement savings plan sponsored by an employer, allowing employees to contribute a portion of their pre-tax or after-tax salary directly from their paycheck. For 2025, employees can contribute up to $23,500 to a 401(k) account. Individuals aged 50 and older can make an additional “catch-up” contribution of $7,500, increasing their total to $31,000 for the year.

A significant feature of many 401(k) plans is the employer matching contribution, where the employer adds funds to the employee’s account based on their contributions. These employer contributions are often subject to a vesting schedule, which dictates when an employee gains full ownership of the employer-provided funds, often through cliff vesting or graded vesting. Your own contributions to a 401(k) are always 100% vested immediately.

401(k) plans typically offer both traditional (pre-tax) and Roth (after-tax) contribution options. Traditional 401(k) contributions reduce taxable income in the present, with withdrawals taxed in retirement. Roth 401(k) contributions are made with after-tax dollars, meaning qualified withdrawals in retirement are tax-free. The total combined contribution from both employee and employer to a 401(k) cannot exceed $70,000 in 2025, or $77,500 for those aged 50 or older.

Exploring IRA Accounts

An Individual Retirement Arrangement (IRA) is a personal retirement savings account that individuals can open independently, separate from any employer-sponsored plan. For 2025, the contribution limit for an IRA is $7,000 for individuals under age 50. Individuals aged 50 and older are permitted to make an additional catch-up contribution of $1,000, bringing their total IRA contribution limit to $8,000 for 2025.

There are two primary types of IRAs: Traditional and Roth. Traditional IRA contributions may be tax-deductible in the year they are made, depending on income levels and whether the individual is covered by a workplace retirement plan. Roth IRAs, on the other hand, receive after-tax contributions, and qualified withdrawals in retirement are tax-free.

Eligibility to contribute to a Roth IRA, or the amount that can be contributed, is subject to Modified Adjusted Gross Income (MAGI) limits. For 2025, single filers can make a full Roth IRA contribution if their MAGI is less than $150,000, while married couples filing jointly can contribute fully if their MAGI is less than $236,000. If income exceeds these thresholds, the contribution amount may be reduced or eliminated entirely.

Deciding Between or Combining Accounts

A common initial strategy is to contribute enough to a 401(k) to receive the full employer matching contribution. The vesting schedule of these employer contributions should be understood to ensure the funds are retained if employment changes.

After maximizing any available employer match, an individual might then consider contributing to an IRA, particularly if they seek greater control over their investment portfolio. IRAs typically offer a wider array of investment options compared to the more limited selection often found within employer-sponsored 401(k) plans. This expanded choice can allow for a more tailored investment strategy aligned with personal risk tolerance and financial goals.

Income levels also play a significant role in determining the most advantageous account type. For individuals with higher incomes, the tax deductibility of Traditional IRA contributions may be limited or eliminated, especially if they also participate in a workplace retirement plan. In such cases, a Roth IRA might be more appealing for its tax-free withdrawals in retirement, provided income limits for direct contributions are met. Conversely, those in higher tax brackets might prefer traditional pre-tax contributions to reduce their current taxable income.

Utilizing both a 401(k) and an IRA allows individuals to contribute above the limits of a single account, significantly increasing their overall retirement savings potential. For instance, in 2025, an individual under 50 could contribute $23,500 to their 401(k) and an additional $7,000 to an IRA, totaling $30,500 in personal contributions. Furthermore, combining traditional (pre-tax) and Roth (after-tax) accounts, whether through a 401(k) or an IRA, offers tax diversification. This strategy provides flexibility in retirement, allowing withdrawals from either tax-free or tax-deferred accounts depending on future tax rates and financial needs.

Practical Steps for Contribution and Coordination

For a 401(k), contributions are typically set up through payroll deductions, where a specified percentage or amount is automatically withheld from each paycheck and deposited into the account. It is advisable to review these deductions regularly, especially when salary changes or contribution limits are adjusted annually.

For an IRA, contributions can be made through a financial institution via direct transfers from a bank account, often set up as recurring automatic transfers to ensure consistent savings. It is important to track total contributions across both account types to avoid exceeding annual limits set by the Internal Revenue Service. Over-contributing can lead to penalties and tax complications.

When changing jobs, or for those with previous employer plans, rollovers can serve as a valuable coordination tool. Funds from an old 401(k) can often be rolled over into a new 401(k) or into an IRA. Ensuring the rollover is executed correctly and directly between financial institutions helps avoid unintended tax consequences.