Can you have a 401k and IRA at the same time?

Can you have a 401k and IRA at the same time

Absolutely! 

In fact this happens quite often. 

When someone moves from one employer to the next they often will move their old 401k dollars into a Rollover IRA account. 

For all intents and purposes the money is treated exactly the same way from a tax deferment perspective, but when rolled over to a brokerage the investment options become significantly better. 

Often 401k plans will be tied into one mutual fund family or offer low rank funds with high administrative fees.  When you roll over you can take charge of asset allocation and control management fees.

Not only can you have both a 401k and an IRA account but you can multiple flavors of IRA accounts–Traditional, Roth, etc.

401k Ira Large

There are limits on total contributions both hard limits for total dollar limits and phase out schedules based on an individual or couples earnings in a calendar year. 

We will get into these specifics later in the article. 

Under the likely scenario that you don’t have funds necessary to max out both the 401k annual limit and the IRA limits, how should you allocate the money? 

Well, this is based on your current tax situation and future earnings potential. 

If you are just getting started, or have just restarted a career and your earnings and tax liability are on the low side you will want to focus on after-tax contributions in a Roth account. 

Pay little tax now, and have that money compound tax free for a period of time, and take your withdraws later tax free when you are at a higher tax bracket.

The only caveat to that is if your employer is generous with their matching contributions to a 401k.  I would contribute to this fund to get the max of the matching, in essence, this is free money.  Then I would turn my attention to the Roth.

However, if I’m in a high tax bracket then it will serve me well to contribute to the 401k to save on taxes now, and focus on the Roth after. 

There are income caps on the Roth. 

The limits for 2019 are 122k for individuals and 193k for couples.  Under that limit this one-two punch of 401k max, then IRA makes sense

Can you contribute to 401k and IRA in the same year?

Contribute to your 401k and IRA

Again, the short answer is yes. 

You can max out your 401k at work and still invest in multiple forms of IRAs.  The 2 distinct flavors of IRAs are pre-tax (Roth) and post-tax (Traditional). 

There are a couple limiters to keep in mind. 

Total contributions into all forms of roth cannot exceed $5,500 for individuals under 50, and $6500 for people over 50. 

So if you fall in the latter age category you can invest $3,000 in a Roth account and $3500 in a traditional IRA. 

Meanwhile your max limit on a 401k is at $19,000 for 2019, or $25,000 if over 50. 

This tallies at a total limit of $31,500 in tax deferred retirement accounts per year if you over 50.  Not only is it possible to have both a 401k and an IRA it is encouraged.

4 reasons to have a 401k and IRA at the same time

Tax Treatment at time of Withdraw

tax obligations

Because a Roth IRA account is after tax dollars the IRS allows us to withdraw the funds and not pay taxes on investment contribution and investment returns. 

The Traditional IRA is just the opposite.  This account is funded with pre-tax dollars and therefore we have to pay taxes at the time of withdraw. 

The best reason to have both types of accounts compounding returns over the years is that you are balancing your tax obligation.

Just as important having multiple account types opens up a few strategic alternatives in how you approach your retirement. 

If I wanted to start to take withdraws from my retirement accounts and I was still employed I would probably start to withdraw funds from the Roth and avoid the tax expense. 

I’d wait to withdraw from my traditional IRA accounts until I’m officially retired and my marginal tax rate is much lower. 

Accessibilities of Roth Withdrawals

Roth Withdraws after time

Roth IRA contributions can be withdrawn at any point and without penalty or tax. 

To be very clear, ‘contribution’ is different than the investment gains made by fund return, this is often referred to as ‘earnings’.

The ability to grab your original contributions without penalty or taxes makes a Roth account a very forgiving investment vehicle. 

That flexibility is most important when near term purchases such as buying a house or paying for a wedding or college education. 

401(k) and traditional IRA accounts require an investor to being taking distributions by the age of 70 ½; however, a Roth account has no such requirement.

More Diversified Portfolio

Diversified Portfolio

401k accounts normally have very limited options. 

And will often be tied into one Family of Funds

Having a Traditional IRA or Roth IRA account with a broker will open up all stocks, bonds, mutual funds, and if you have the experience Options. 

Having these different investment alternatives will help you diversify across assets and geographies. 

This should help mitigate the volatility in your portfolio.

You Can Be Strategic in how you Fund the Accounts                         

Ideally, you’d want to maximize contributions to all retirement accounts. However, that’s not always possible, so what are the principles on how to allocate limited funds:

  1. Get the full employer match in the 401k
  2. Contribute to a Roth IRA until you hit the income limiters
  3. Contribute to a Traditional IRA
  4. Then return to hit max limit on the 401k
  5. Finally, save the rest in a taxable account that is Equity/Stock focused

The above allocation will help maximize the dollars allocated to retirement funds, allow the most dollars (pre-tax) to begin the magic of compounding, diversify your tax obligation at time of withdraw, and give you the most options to establish a diversified portfolio.

The final reason I like to mix between 401k and IRAs is that IRAs give me the ability to control the fees that pay investment companies. 

401k’s are traditionally the least tax efficient vehicle.

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