Search

Can I Contribute to Both a 401(K) And an IRA? | Beem

The end goal of both an IRA and a 401(k) is to create a nest egg for your life after retirement. However, choosing between the two depends on your needs.
Can I Contribute to Both a 401(K) And an IRA? | Beem
There are many different types of investment accounts that you can use to build your wealth, but retirement accounts such as IRAs and 401(k)s were introduced specifically to encourage people to save for retirement.
In this article

A 401(k) is offered by your employer while IRAs are retirement accounts that you open on your own.  While one option is generally enough to build a reserve of wealth after you retire, there is no reason why you can’t have both. 

IRA – Individual Retirement Account

A traditional IRA enables individuals to make contributions without taxation and your investments through this account can grow tax-free. However, you will have to pay regular income tax on your final IRA withdrawal. 

Traditional IRAs can be opened through an online broker, a robo-advisor, or a bank. With an online broker, you will be able to invest in stocks and bonds. Bank IRAs, on the other hand, typically offer Certificates of Deposit and savings accounts. You can invest your money in various ways.

With an IRA account, you can invest in stocks, bonds, and other assets. How much your earnings grow or shrink every year depends on how you invest. If you are saving for a long-term goal like retirement, stocks and bonds have historically proven to be the best choice, with higher returns. 

You may also like : Backdoor Roth IRA is a method not a retirement account

How You Can Invest?

Your contributions are limited. You can invest $6,000 every year according to the 2020-2021 rules ($7,000 for 50 years or older), even if you are already contributing to a 401(k) or another workplace savings plan. 

Contributions you make are tax-deductible. For instance, if you have earned $50,000 and you contribute $6,000 to a traditional IRA, then you will only have to pay income tax on $44,000 that year if you qualify for deductions.

You may also like : Roth IRA withdrawal rules you need to know for retirement planning

Rules for Withdrawal

There are some rules for withdrawing. Your Traditional IRA investments are not taxed until you make a withdrawal. Also, keep in mind that early withdrawal will be taxed as regular income and you will have to pay an additional penalty as well. Traditional IRAs are different from Roth IRAs. With Roth IRAs, your contributions are not tax-deductible, but your withdrawals are tax-free in retirement. 

Typically, you can begin taking money from a traditional IRA after you are 59 ½ years old. When the money from your traditional IRA is released, you will have to pay regular income tax. For early withdrawal, before age 59 1/2, you may be charged a 10% penalty, except for college tuitions, or mortgages, etc. You can choose to not take your IRA distributions when you turn 59 ½, you can delay it till you are 70 1/2.

Also Known About : IRA vs 401(k)

401(k)

A 401(k) is an employee retirement plan offered by employers to their employees. With a 401(k) account, a portion of your salary goes into the account before taxes. The same amount is matched by the employer and deposited into the account. Similar to IRAs, the 401(k) offers tax deductions for both the employer and the employee. Returns that come from a 401(k) are tax-free until withdrawal. 

The contribution limits for employees are $19,500 per year for those under the age of 50 and $26,000 for those above the age of 50.

The combined annual employer/employee contribution towards a 401(k) is capped at $58,000 for those under 50 years old and $64,500 for those over 50 years old. The penalty fee for 401(k)s for premature withdrawal is the same as a traditional IRA.  

You Can Have Both

The end goal of both an IRA and a 401(k) is to create a nest egg for your life after retirement. However, choosing between the two depends on your needs.

401(k) enables account holders to make larger annual contributions than IRAs. However, investment options in a 401(k) are limited and the account holder has no say in where the money is invested. IRAs, on the other hand, have lower limits on annual contributions but offer wider investment options. IRAs also give investors the opportunity to manage their investment themselves and have more control over it, while 401(k)s do not. 

If you have the financial ability to contribute to both the IRA and 401(k), then it is definitely something you should consider doing. 

Also Known About : How to Rollover Your 401(k) Plan Smoothly While Switching Jobs

Retirement Goals

Since 401(k)s have employer contributions, it significantly increases the amount you can save. If your employer matches 100% of your contribution, and you also have the financial ability to invest in an IRA, there’s nothing better for your retirement goals. On the other hand, if your employer does not match your 401(k) contribution, you can invest in an IRA of your choosing and even increase your contribution to your 401(k). 

Investing in a 401(k) means less of your income is taxable than if you invest in an IRA. Moreover, if you see your income rising significantly over the next few years, increasing your 401(k) contribution may help you keep your taxable income low as you keep building a healthy nest egg. 

Was this helpful?

Did you like the post or would you like to give some feedback? Let us know your opinion by clicking one of the buttons below!

👍👎
Salakha Sharma

Salakha Sharma

Salakha is a content specialist with a mixed background in digital learning and digital media marketing. With over 7 years of industry experience under her belt, she authors content on a variety of topics including business, technology and finance. She swears by three things - coffee, the Oxford English Dictionary and simple content.

This page is purely informational. Beem does not provide financial, legal or accounting advice. This article has been prepared for informational purposes only. It is not intended to provide financial, legal or accounting advice and should not be relied on for the same. Please consult your own financial, legal and accounting advisors before engaging in any transactions.

Related Posts

How long will your retirement savings last
How Long Will Your Retirement Savings Last
Explore the complexities of retirement planning and learn solutions to ensure a safe financial future. Investigate the 4% rule, dynamic withdrawals, and the ground-breaking Income Floor Strategy as you navigate the intricacies of changing markets with bespoke solutions.
How millennials can plan for their aging parents
Saving is always a critical factor for millennials, more so when family and aging parents are involved. Don't know where to start planning your finances for them? We're here to help you get started. 
Ready to Retire? 3 Telltale Signs It’s Your Time
The most common scenario is people should first be financially ready before they have made up their minds emotionally. Retired people do not get a paycheck but they live on their savings and other financial resources.
Saving for Retirement- How to Save |Top Tips
You can make an informed choice with a handful of mutual funds for retirement using a smart, diversified investment portfolio. You can recreate your 401(k) easily with "lazy portfolios" while robo-advisors offer low-cost solutions.

Features

Essentials
Everdraft™

Get up to $1,000 for emergencies

Send Money, Pay Later™

Send money to anyone in the US

BFF - Better Financial Feed

Ger personalized financial insights

Credit Monitoring

Monitor and grow credit score

Cash back

Get up to 20% on everyday spends

Car-Insurance

Save up to 40% on car insurance

Job-Loss & Disability Protection

Get up to $1,000 for loss of income

Identity Theft Insurance

Insure up to $1 Million

Health Insurance

Coming Soon

File Taxes

File federal and state taxes at low cost

Tax Calculator

Quick estimate of your tax returns

Personal Loan

Get up to $1,000 for emergencies

High Yield Savings

Send money to anyone in the US

Save big on auto insurance - compare quotes now!

Zip Code:
Zip Code: