Can You Have a 401K and an IRA at the Same Time?

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IRAs and 401(k)s are effective ways to put away money for retirement. It is possible to have both types of accounts at the same time, but it might not always be possible to invest new money into both types of accounts during the same year. New investments are subject to annual contribution limits and to income limitations.

401(k) Basics

401(k) plans are employer-sponsored and only available through the workplace. When changing jobs from one employer to another, employees may sometimes keep their 401(k) plan with the same financial institution depending on what kind of plan has been established. Otherwise, the 401(k) may be moved to an IRA rollover plan, even if the employee has a new 401(k) plan with the new employer. Investors may have a mix of IRAs and 401(k)s from former and current employers.

Traditional IRAs and 401(k)s

Most traditional IRAs are self-funded accounts not associated with an employer. Any individual who meets government-designated income requirements is eligible for a traditional IRA. All or a portion of the contribution is tax deductible based on a sliding scale. Individuals can still contribute to a traditional IRA even if enrolled in another retirement plan–including a 401(k)--but eligibility for tax deductions is limited.

SEP IRAs and 401(k)s

Simplified Employee Pension (SEP) IRAs give small employers the opportunity to offer employees retirement accounts without the high administrative costs and complications of 401(k) or other pension plans. They are especially popular with self-employed individuals. Employers may simultaneously contribute to both a SEP and a 401(k) plan for their employees, but there are total contribution limitations. The dollar amount limit changes with each tax year, so current limits should be verified with the IRS. Contributions to all retirement plans combined cannot exceed 100 percent of the employee’s compensation.

SIMPLE IRA and 401(k)s

SIMPLE (Savings Incentive Match PLan for Employees) IRAs are similar to SEPs except that either the employer or the employees may contribute to the plans. An employee may participate in a retirement plan, such as a 401(k), with another employer during the same year. However, if the employee participates in both a 401(k) and a SIMPLE IRA, contribution limits must still be observed. It is the employee’s responsibility, not the employer’s, to not exceed contribution limits. Likewise, if an employee also participates in the same employer’s 401(k) plan, the total contributions cannot exceed the limitation guidelines set forth by the IRS for that year.

Roth IRAs and 401(k)s

Roth IRAs are different from all other IRA plans because their initial investments are made with taxable dollars, but upon retirement no taxes are paid when distributions are withdrawn. Investors may participate in a traditional IRA and a Roth IRA at the same time as well as in a 401(k) and a Roth IRA at the same time. However, Roth IRA contributions are only available to investors whose household modified adjusted gross income (AGI) is below the threshold established by the IRA for that tax year.


About the Author

Annabella Gualdoni has written newsletters and reports for corporations and nonprofits since 1994. She is a real estate professional and also teaches subjects including international cooking and travel, dating/relationships and personal finance. Gualdoni has a Bachelor of Arts in international development from University of California, Berkeley, a Master of Arts in international relations from Boston University, and a Juris Doctor from Boston College Law School.

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