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. Let’s take a look at the rules for both plans so you can make the most out of your investments.
A financial advisor can help you make the right retirement planning decisions utilizing both types of accounts.
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 matching contributions to your 401(k).
Below, we detail the 2023 and 2024 contribution limits for 401(k)s in detail.
401(k) Contribution Limits for 2023
| Details | Limit |
|---|---|
| Maximum employee contribution | $22,500 |
| Catch-up contribution if 50 or older | $7,500 |
| Total defined contribution plan max from all sources including employer contributions | $66,000 |
| Total defined contribution plan max from all sources if at least 50 years old (including catch-up) | $73,500 |
401(k) Contribution Limits for 2024
| Details | Limit |
|---|---|
| Maximum employee contribution | $23,000 |
| Catch-up contribution if 50 or older | $7,500 |
| Total defined contribution plan max from all sources including employer contributions | $69,000 |
| Total defined contribution plan max from all sources if at least 50 years old (including catch-up) | $76,500 |
Contribution limits for IRAs are a bit more straightforward. For 2023, you can contribute up to $6,500 — $7,500 if you’re at least 50 years old. In 2024, those figures increase to $7,000 and $8,000, respectively.
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 fully 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 for different circumstances:
2023 IRA Tax Deduction Limits If You Have a Workplace Plan
| Filing Status | MAGI | Allowable IRA Tax Deduction |
|---|---|---|
| Single or head of household | $73,000 or less | Full deduction up to the annual IRA contribution limit |
| More than $73,000 but less than $83,000 | Partial deduction | |
| $83,000 or more | No deduction | |
| Married Filing Jointly | $116,000 or less | Full deduction |
| More than $116,000 but less than $136,000 | Partial deduction | |
| $136,000 or more | No deduction | |
| Married filing separately | Less than $10,000 | Partial deduction |
| $10,000 or more | No deduction |
2024 IRA Tax Deduction Limits If You Have a Workplace Plan
| Filing Status | MAGI | Allowable IRA Tax Deduction |
|---|---|---|
| Single or head of household | $77,000 or less | Full deduction up to the annual IRA contribution limit |
| More than $77,000 but less than $87,000 | Partial deduction | |
| $87,000 or more | No deduction | |
| Married Filing Jointly | $123,000 or less | Full deduction |
| More than $123,000 but less than $143,000 | Partial deduction | |
| $143,000 or more | No deduction | |
| Married filing separately | Less than $10,000 | Partial deduction |
| $10,000 or more | No deduction |
2023 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 | $218,000 or less | Full deduction up to IRA contribution limit |
| More than $218,000 but less than $228,000 | Partial deduction | |
| $228,000 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 |
2024 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 | $230,000 or less | Full deduction up to IRA contribution limit |
| More than $230,000 but less than $240,000 | Partial deduction | |
| $240,000 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 in 2024 by visiting IRS Notice 2023-75.
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. 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, as well.
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.
Some plans can charge hefty administration fees while fund expenses can also 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 financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel 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 investment options and low fees. To help narrow down your choices, we published a report on where you can open an IRA 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 to retire comfortably.
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