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You can have a 401(k) plan and an individual retirement account (IRA) at the same time. In fact, you can contribute up to the annual limit to each account, thereby maximizing your retirement savings. However, your ability to take a tax deduction for your IRA may be limited, depending on factors like your income and whether your spouse is covered by an employer-sponsored retirement plan. A financial advisor can help you make the right retirement planning decisions utilizing both types of accounts. Let’s take a look at the rules for both plans so you can make the most out of your investments.
Advantages of Having a 401(k) and an IRA
The advantage to having a 401(k) and a traditional IRA is that you can effectively increase your overall contributions toward retirement savings that can then grow tax-deferred. Each year, the IRS sets contribution limits for 401(k)s and IRAs.
Though you may not be able to claim a tax deduction on all your contributions, you can max out each type of account in the same tax year. Plus, the IRS permits those who are at least 50 years old to make additional “catch-up” contributions into each account. And you’re in even more luck if your company makes employer matching contributions into your 401(k).
Below, we detail the 2021 and 2022 contribution limits for 401(k)s in detail.
| 401(k) Contribution Limits for 2021 | |
| Details | Limit |
| Maximum employee contribution | $19,500 |
| Catch-up contribution if at least 50-years-old | $6,500 |
| Total defined contribution plan max from all sources including employer contributions | $58,000 |
| Total defined contribution plan max from all sources if at least 50-years-old (including catch-up) | $64,500 |
| 401(k) Contribution Limits for 2022 | |
| Details | Limit |
| Maximum employee contribution | $20,500 |
| Catch-up contribution if at least 50-years-old | $6,500 |
| Total defined contribution plan max from all sources including employer contributions | $61,000 |
| Total defined contribution plan max from all sources if at least 50-years-old (including catch-up) | $67,500 |
Contribution limits for IRAs are a bit more straightforward. For 2021 and 2022, you can contribute up to $6,000. That amount goes up to $7,000 if you’re at least 50 years old.
As you can see, an employer match in a 401(k) arrangement can significantly boost your retirement savings. But employers that contribute to their employees’ 401(k) plans typically impose certain rules around company matches. So it’s a good idea to contribute at least the amount your employer matches to your 401(k). Your company may also require a vesting period. This is how long you must work at the company to actually own the contributions your firm makes to your account.
That said, if you’re what’s called a highly-compensated employee, your employer may place stricter limits on your 401(k) contributions. This is because federal law regulates employer-sponsored retirement plans in an attempt to prevent higher-earning employees from benefiting more from tax benefits than their lower-earning counterparts. So companies offering 401(k)s must conduct what’s called means testing.
Disadvantages of Having a 401(k) and IRA
Under most circumstances, the IRS permits you to make tax-deductible contributions to your IRA up to the annual limit.
But contributing to a 401(k) account may lower the amount of your IRA contribution that is tax deductible (or even disallow it), depending on your modified adjusted gross income (MAGI) and whether your spouse is covered by an employer-sponsored retirement plan. This might be something you’ll want to go over with a financial planner or financial advisor.
The tables below explain IRA tax deduction rules depending on different circumstances:
| 2021 IRA Tax Deduction Limits If You Have a Workplace Plan | ||
| Filing Status | MAGI | Allowable IRA Tax Deduction |
| Single or head of household | $66,000 or less | Full deduction up to the annual IRA contribution limit |
| More than $66,000 but less than $76,000 | Partial deduction | |
| $76,000 or more | No deduction | |
| Married Filing Jointly | $105,000 or less | Full deduction |
| More than $105,000 but less than $125,000 | Partial deduction | |
| $125,000 or more | No deduction | |
| Married filing separately | Less than $10,000 | Partial deduction |
| $10,000 or more | No deduction |
| 2022 IRA Tax Deduction Limits If You Have a Workplace Plan | ||
| Filing Status | MAGI | Allowable IRA Tax Deduction |
| Single or head of household | $68,000 or less | Full deduction up to the annual IRA contribution limit |
| More than $68,000 but less than $78,000 | Partial deduction | |
| $78,000 or more | No deduction | |
| Married Filing Jointly | $109,000 or less | Full deduction |
| More than $109,000 but less than $129,000 | Partial deduction | |
| $129,000 or more | No deduction | |
| Married filing separately | Less than $10,000 | Partial deduction |
| $10,000 or more | No deduction |
| 2021 IRA Tax Deduction Limits If You Do NOT Have a Workplace Plan | ||
| Filing Status | MAGI | Allowable IRA Tax Deduction |
| Single or head of household | Any amount | Full deduction up to annual IRA contribution limit |
| Married filing jointly or separately with a spouse who is not covered by a workplace plan | Any amount | Full deduction up to annual IRA contribution limit |
| Married filing jointly with a spouse who has a workplace plan | $198,000 or less | Full deduction up to IRA contribution limit |
| More than $198,000 but less than $208,000 | Partial deduction | |
| $208,000 or more | No deduction | |
| Married filing separately with a spouse who is covered by a plan at work | Less than $10,000 | Partial deduction |
| $10,000 or more | No deduction |
| 2022 IRA Tax Deduction Limits If You Do NOT Have a Workplace Plan | ||
| Filing Status | MAGI | Allowable IRA Tax Deduction |
| Single or head of household | Any amount | Full deduction up to annual IRA contribution limit |
| Married filing jointly or separately with a spouse who is not covered by a workplace plan | Any amount | Full deduction up to annual IRA contribution limit |
| Married filing jointly with a spouse who has a workplace plan | $204,000 or less | Full deduction up to IRA contribution limit |
| More than $204,000 but less than $214,000 | Partial deduction | |
| $214,000 or more | No deduction | |
| Married filing separately with a spouse who is covered by a plan at work | Less than $10,000 | Partial deduction |
| $10,000 or more | No deduction |
You can access more information about IRA contributions and rules by visiting IRS Publication 590-A.
But you can explore the pros and cons of each plan to decide whether you should contribute to both.
Benefits and Disadvantages of an IRA
If you contribute to an employer-sponsored plan such as a 401(k), your investment options are limited to a menu approved by your employer. Depending on your company, that investment menu may be considerably small.
But opening an IRA gives you access to virtually the entire investment world to build your retirement savings with. You can also seek the help of a financial advisor to construct a personalized investment menu using securities such as the following:
- Stocks
- Bonds
- Mutual funds
- Real-estate investment trusts (REITs)
However, IRA contribution limits are far lower than those set for 401(k) plans. In addition, your company may offer matching contributions up to certain limits into your 401(k). This is essentially free money. So an IRA falls short here.
Benefits and Drawbacks of a 401(k)
The prospect of employer matches and large contribution limits can give the 401(k) an edge, but it does have its limitations. For instance, companies typically place stricter restrictions around your funds. No law states they must allow hardship withdrawals, for example.
And some plans can involve hefty administration fees and fund expenses that can add up, taking a chunk out of your retirement savings. That’s why you should learn everything you need to know about 401(k) fees. Generally speaking, though, the larger the company, the lower the fees.
Bottom Line
401(k)s and IRAs can serve as solid retirement savings vehicles. One isn’t necessarily better than the other. But one can be preferable, depending on certain individual circumstances. If your employer offers poorly performing and high-cost investment options, you may want to turn to an IRA. But if you work for a larger company and it offers an employer match, the 401(k) may be more appealing.
If you can afford it, you can contribute to both. This strategy can help you boost retirement savings. But you must pay close attention to your MAGI and your spouse’s situation if you’re married. Depending on your circumstances, contributions to both can limit your capacity to claim the tax breaks allowed with your IRA.
Tips on Growing Your Retirement Savings
- A financial advisor can help you allocate your assets across a 401(k), IRA and taxable brokerage accounts. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- When you’re shopping around for an IRA, you should open one with a financial institution that offers robust funds and low fees. To help narrow down your choices, we published a report on the best IRAs in the market today.
- Do you need help setting up and planning your retirement goals? SmartAsset’s retirement calculator can help you figure out how much you will need to save in order to retire comfortably.
Photo credit: ©iStock.com/KaraGrubis, ©iStock.com/designer491, ©iStock.com/artin-dm
Javier Simon, CEPF® Javier Simon is a banking, investing and retirement expert for SmartAsset. The personal finance writer's work has been featured in Investopedia, PLANADVISER and iGrad. Javier is a member of the Society for Advancing Business Editing and Writing. He has a degree in journalism from SUNY Plattsburgh. Javier is passionate about helping others beyond their personal finances. He has volunteered and raised funds for charities including Fight Cancer Together, Children's Miracle Network Hospitals and the National Center for Missing and Exploited Children.
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