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Can I have a 401(k) and an IRA at the same time?

There are several avenues that you may pursue to save for retirement and some come with tax benefits. But what are the rules for investing in more than one?

¿Qué es un plan de jubilación calificado y cómo sé si el mío lo es?

The federal government in an effort to encourage Americans to build up a nest egg for retirement gives tax benefits for squirreling away funds to be used in your golden years. Two of the most commonly known are 401(k) retirement plans and an Individual Retirement Account (IRA).

Both investment vehicles come in two forms, traditional and Roth. The former is tax deductible but there are limits on the amount you can put into one or several each year. The money and any gains are taxed as income once you start withdrawing, usually after retirement. But can you have both an IRA and a 401(k) plan?

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Rules for investing in both 401(k) and IRA simultaneously

Simply put, yes, and it is quite common to have both a 401(k) along with an IRA at the same time if you have earned income. However, every person’s situation is different and depending on the type of plan and your income, your tax benefits from making contributions may be limited.

Every year the Internal Revenue Service updates the amount of money that contributors can put into their IRA and/or 401(k) accounts. The limits are put in place to avoid people using them as a way of evading taxes. However, you may be eligible to make non-deductible IRA contributions, i.e. with after-tax dollars, as well sock money away in a Roth IRA at the same time. But keep in mind that income and contribution limits apply for each specific situation.

Increase to 401(k) contribution limits for 2023

Due to high inflation in 2022, the contribution limits for 401(k) jumped nearly 10 percent for contributions in 2023. Retirement savers will be able to inject an additional $2,000 next year for a maximum tax deferral amount of $22,500 for 401(k)s, 403(b)s, most 457 plans, and Thrift Savings Plan.

Depending on their situation, individuals may put more into their 401(k) with a total annual contribution cap to all of your accounts of $66,000, or $73,500 for those who can make catch-up contributions, an increase of $5,000 over the 2022 limits.

Those who are above the age of 50 are also eligible for catch-up contributions above the $22,500 cap. Instead of the $6,500 limit in 2022, employees above age 50 can put an additional $7,500 into their 401(k) for a total contribution of $30,000. However, the catch-up contributions for traditional or Roth IRAs is unchanged for 2023.

Increase to IRA and Roth IRA contribution limits for 2023

Both traditional IRA and Roth IRA annual contribution limits have increased as well for 2023 by $500 for a maximum of $6,500. The additional catch-up contribution, again for savers above age 50, is $1,000, the same next year as for 2022.

These limits are reduced for individuals whose income surpasses certain income thresholds which are different for those who have an employer retirement account, or their spouse does, and those who neither they nor their spouse do. Those who exceed the upper limit of the phase out threshold are not eligible for the tax benefits.