Can I Contribute to an IRA and a 401(k)? Yes, and 2024’s Contribution Limits Are Still at Record Highs

Contributing to retirement accounts can help you boost the tax efficiency of your retirement investments and potentially grow your wealth faster. The good news is that you may have access to multiple paths, from an employer’s 401(k) plan (if one is available) to an individual retirement account (IRA). Consider making those contributions automatic and tailor your portfolio to your own risk tolerance and long-term strategy.

And in 2024, as most taxable and tax-deferred plan contribution limits are linked to inflation that reached 40-year highs in 2022, you’ll likely be able to sock away significantly more than you did last year.

Taking advantage of an IRA and a 401(k) sounds like great advice, but it may be confusing to decide exactly how to go about doing it all and which retirement-saving moves should take priority over others. Let’s look at an example of a three-step plan for contributing to both an IRA and a 401(k) in a way that can potentially maximize multiple tax-advantaged retirement contributions. (Keep in mind that all investing involves risk, including the loss of principal invested.)

Remember, however, that the rules in place today for 401(k) and IRA contribution limits are likely to change over the years. That said, here are three steps you can take to try to maximize your retirement savings plan across accounts and account types. 

1. Contribute to a 401(k)

If your employer offers a 401(k) with a matching contribution, many financial advisors recommend you take advantage of it. An employer match on your contribution can be considered “free money,” and who wants to leave a freebie on the table?

The amount of matching funds you receive depends on what your employer offers. Often, this contribution is tied to your longevity at the company and may be on a “vesting schedule,” which gives employees full ownership of their funds over time. Vesting schedules aim to provide a financial incentive to employees to stay with a company.

So, it’s important to know the specifics of your company’s 401(k) contribution plan, including what percentage of your salary it will match and how long it may take for you to have the rights to those matching contributions.

There are no income restrictions for participating, but here are the 2024 limits on how much you can contribute, according to the Internal Revenue Service (IRS).

• If you’re younger than 50, the 401(k) contribution limit for 2024 is $23,000, up from a previous $22,500.
• Those 50 and older are allowed to up the ante with an additional $7,500 catch-up contribution, for a total of $30,500.
• According to the IRS, these new 2024 limits also apply to 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plan.

Remember: Your employer’s matching contribution doesn’t count toward the annual contribution limit. Consider contributing enough to at least get your company match.

For example, a common matching formula is a 50% match up to 6% of pay. This means that for every dollar you contribute, the company will put 50 cents in your account. But you’ll only get the match up to 6% of your pay. So, say, if you earned $50,000, then you’d be matched on all your contributions up to $3,000 ($50,000 x 6%).

And if you get a raise or a bonus, you might want to earmark a portion to your retirement account. 

Generally, the amount you contribute to a traditional 401(k) is taken out of your paycheck on a pretax basis, thereby reducing your taxable income. However, when you withdraw those funds, you’ll have to pay taxes on the full amount of the withdrawal, including gains. Alternatively, if your employer offers a Roth salary deferral, then the money is still automatically deducted from your pay, but it is included in your federal tax income now. The good news is that although money deposited into a Roth 401(k) account was already taxed as normal income, once you reach retirement, you may withdraw those funds tax free, no matter how much you’ve made in gains. 

When deciding between a traditional 401(k) and Roth 401(k), the choice is between deferring taxes until the money is withdrawn in retirement or paying federal taxes up front but never again. Keep in mind, this reflects current conditions and could always change.

2. Supplement with an IRA

Can I have both a 401(k) and an IRA? You bet, but there are rules to follow, and your personal circumstances matter.

Say you’ve planned to contribute at least the maximum employer-matching amount to your 401(k). Now, you might consider your next set of choices. You may want to continue contributing up to the maximum contribution limit, or you may want to use an IRA, which would not be related to your place of employment like a 401(k) is.

Even if you contribute the maximum to a work-sponsored 401(k) or similar plan, you may still be able to contribute the full amount to an IRA. However, if it’s a traditional IRA, such a contribution might not be tax deductible. Having a workplace plan can affect your IRA deduction. If you have access to a workplace retirement plan, your IRA deduction begins phasing out when your modified gross adjusted income (MAGI) reaches $77,000 for single filers and $123,000 for joint filers in 2024. See IRS Publication 590-A for more on IRA deduction limits and income phaseouts.

You may want to consider speaking with a tax professional about your individual situation.

If you want to contribute to a Roth IRA, you must meet income requirements, with a maximum MAGI limit of $161,000 for single filers and $240,000 for married filers in 2024. If you’re over the maximum limits for contributing to a Roth IRA, then make sure you’re reviewing whether Roth contributions are allowed in your workplace 401(k) and if you’re making the maximum 401(k) contribution possible.  

3. Open more than one IRA

Because they’re on separate sides of the tax spectrum, traditional and Roth IRAs can play off each other in retirement. Having a combination of taxable and tax-free income may help you create a withdrawal plan that might potentially minimize your tax bill in retirement.

You’ll need to start taking required minimum distributions (RMDs) from your traditional IRA once you turn 73, but this rule doesn’t apply to Roth IRAs. That means your money can stay invested longer.

There’s one caveat to owning and investing in more than one IRA: The annual limits on your contributions are cumulative between all IRAs you fund, not each individual one. You can split your contributions any way you want as long as you don’t exceed the annual limit and you meet the income rules. For example, if you contribute the full $7,500 to a traditional IRA in 2024, you can’t contribute to a Roth IRA in that same year. IRAs also come with catch-up contributions for those older than 50, allowing you to add an extra $1,000 to your account in 2024.

A few more things to know: Certain businesses might offer employees a SEP-IRA or SIMPLE IRA plan. These plans have special rules and do not fall under the contribution limits for traditional or Roth IRAs. If you participate in or offer a SEP-IRA or SIMPLE IRA, you can still consider contributing to a traditional or Roth IRA, just like those with a 401(k) can.

Note that pulling money out of your IRA and 401(k) early can be pricey:

• The IRS slaps on a 10% penalty for early distributions (generally before age 59 1/2).
• If the money is pulled from a traditional IRA or 401(k), there are income taxes to face.
• For Roth IRAs, the 10% penalty and taxation only apply to earnings withdrawn before age 59 1/2.
• For Roth IRAs, penalties also apply if the account has not been open for at least five years, even if you’re age 59 1/2.

Depending on which period of your life the funds are withdrawn from your IRA and 401(k), the opportunity costs of pulling money out early could put a big dent in your retirement nest egg because those assets are no longer growing tax deferred. Although there are exceptions, it’s important to understand them before you withdraw. Consider consulting with a knowledgeable retirement or tax professional before moving forward.