Can I Contribute to Traditional IRA and 401k?

Many taxpayers have employer retirement accounts such as 401k and wonder if they could contribute to both traditional IRA and 401k.

Can I Contribute to Traditional IRA and 401k?

A taxpayer can always contribute to a traditional IRA if he or she meets the traditional IRA requirements whether he or she has a 401k or other employer retirement plan or not. However, the amount of tax deductions can be limited if a taxpayer has a 401k as well as a traditional IRA.

IRS tax laws on having a traditional IRA and a 401k

If a taxpayer or his or her spouse was covered by an employer retirement plan such as a 401k at any time during the tax year for which he or she makes contributions to the traditional IRA, then the tax deduction on the amount contributed may be reduced or wiped out.

Limit on tax deduction of traditional IRA contributions if covered by a 401k plan

The amount of tax deduction on traditional IRA contributions are reduced or disallowed depending on the following factors:

• whether you or your spouse is covered by an employer retirement plan such as a 401k
• your income
• your filing status
• any social security benefits received.

Should I contribute to traditional IRA and 401k?

For retirement saving, a taxpayer should try to contribute as much as possible into their retirement accounts whether it is a 401k or a traditional IRA or a Roth IRA. Even if the contribution to the traditional IRA is not tax deductible, investments in the traditional IRA account still grow tax deferred resulting in much faster growth than in a taxable account. If money is not an issue, most taxpayers will max out their contributions to traditional IRA and also their 401k account.

Should I contribute to traditional IRA or 401k?

There are many reasons why contributing to a traditional IRA may be better than contributing to an IRA and vice versa. If the employer offers a match up contribution to the 401k contributions, then contributing to the 401k is better than contributing to a traditional IRA. However, investment choices are also important. If the 401k account does not offer many investment choices and the employee has to invest in the company stock or in portfolios that may not be performing well, then contributing to a traditional IRA will give the investor more flexibility to invest in better investments.