Yes, you can have both a 401(k) and an IRA—and both offer advantages that may help you make continuous progress toward your financial goals.
Save as much as you can, for as long as you can: That’s what nearly every financial professional encourages for retirement. So why don’t more people contribute to both a 401(k) and an individual retirement account (IRA)? They may not be aware that they can—and that saving in both types has advantages to help you reach your financial goals.
If you didn’t know before, now you do: Generally, you can contribute to a 401(k) if you have an IRA—and contribute to an IRA if you have a 401(k). Here’s why it’s a savings strategy to consider.
Use an IRA as your retirement ‘home base.’
Most people are likely to have multiple jobs with multiple employers. Take people born from 1957 to 1965: They have held an average of 12 jobs—and that’s just one subgroup of baby boomers.
Here’s why that matters: Say you’ve had a job or two that offers a 401(k). When you’ve left those jobs, you have to choose what to do with those funds. If you have a traditional IRA—set up and funded entirely by you—you can roll those old 401(k) funds into that IRA. Doing so helps you keep track of all your savings and consolidates your accounts, too.
That’s one reason why some people prefer setting up and contributing to an IRA. “It gives you a long-term account that, as you change employers over time, you can use to consolidate your money,” says Stanley Poorman, a financial professional at 51ԹϺ®.
Help max out your savings, when you can, with both an IRA and 401(k).
Your true time horizon for saving for retirement is the rest of your working life. So even if you can’t max out every year, maxing out when you can, can help you get to your goals.
For example, if you’re not able to max out your 401(k) contribution, try to save at least enough to get the full match from your employer; it’s often referred to as free money.
Or, let’s say you’re a super saver: You’re already getting your full employer 401(k) match and contributing the maximum allowed by that plan. But you want to make even more progress. That’s one reason you might want to open or contribute to an IRA.
Access a wide range of investment options.
Every 401(k) or IRA is generally managed by an investment professional. They choose investments based on the fund’s objectives. Having both a 401(k) and an IRA may enable you to widen your options, Poorman says, giving you both control and flexibility. “It’s really opening up your choices,” he says.
Tap into tax benefits with both an IRA and a 401(k).
Your tax professional can give you more insight into whether contributing to both a 401(k) and IRA may help your taxes. The short answer: It depends on how much you’re contributing to each account and your income.
| Account type | Income contribution limits | Tax deduction | Referred to as | Tax on qualified withdrawals |
|---|---|---|---|---|
| Roth IRA | Yes | No | Post tax; contributions already been taxed | No |
| Traditional IRA | Yes | Pre tax | Pre tax; contributions haven’t been taxed | Yes |
| 401(k) | Yes | Pre tax | Pre tax; contributions haven’t been taxed | Yes |
What’s next?
How much progress have you made toward your retirement goals? to find out. First time logging in? Get started by creating an account. Want to contribute to an individual retirement account on your own? We can help you set up an IRA.
