Can you contribute to a 401k and IRA?

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During the 31-Day Money Challenge, readers sent in a lot of great questions. One question from a reader named David is one I’ve received many times. Here it is:

My 401k is maxed out for the year at 17,500 + 5,500. Can I also contribute a total of 6,500 to a conventional IRA with after-tax money? I’m over 50.

Whether you can contribute to both a 401k and IRA confuses a lot of people. We can thank the IRS for all the confusion. To its credit, the IRS does offer Publication 590 that is designed to answer all of our questions. At over 100 pages, PUB 590 is a lot to digest.

While I recommend that you take the time to read PUB 590 for yourself, here are the highlights as it relates to contributing to both a 401k and an IRA.

Non-Deductible IRA

David’s question above asked whether he could contribute “after-tax” money to an IRA. Although some mistakenly believe that all IRA contributions are deductible, they are not. We’ll get to deductible IRA accounts in the next section. Here, let’s focus on the simple question of who can open and fund an IRA, irrespective of whether the contributions they make are deductible.

As set forth in PUB 590, anybody can open an IRA if they meet just to requirements:

  • You (or, if you file a joint return, your spouse) received taxable compensation during the year, and
  • You were not age 70 1/2 by the end of the year.

Here’s the key–you can have an IRA regardless of whether you have a retirement plan at work. However, you contributions may not be deductible. From PUB 590: “You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan.”

The other key aspect to David’s question is whether he is entitled to contribute $6,500 to an IRA. The contribution limits can change from year to year. In 2014, you can contribute up to $5,500 ($6,500 for those 50 or older), or your taxable compensation, which ever is lower. So as long as David has taxable compensation of at least $6,500 (which he must have to max out his 401k) and is 50 or older, then he can contribute this amount to an IRA.

Deductible IRA

The bigger question for many is whether they can deduct their IRA contributions. The answer depends on a number of factors: whether you or your spouse has a retirement plan at work; how much you and your spouse make; and your filing status. The rules get complicated, but here are the high points:

  • Single, head of household, or qualifying widow(er) with no retirement plan at work: IRA contributions are deductible.
  • Married filing jointly or separately with no retirement plan at work for either spouse: IRA contributions are deductible.
  • Single or head of household with a retirement plan at work: Full IRA contribution deductible if modified AGI is $59,000 or less. The deduction begins to phase out at $59,001 and no deduction is allowed at $69,000 or more.
  • Married filing jointly or qualifying widow(er) with a retirement plan at work: Full IRA contribution deductible if modified AGI is $95,000 or less. The deduction begins to phase out at $95,001 and no deduction is allowed at $115,000 or more.
  • Married filing separately with a retirement plan at work: A partial deduction is allowed if modified AGI is $10,000 or less. No deduction is permitted with modified AGI of $10,000 or more.
  • Married filing jointly with no retirement plan at work, but your spouse has a workplace retirement plan: Full IRA contribution deductible if modified AGI is $178,000 or less. The deduction begins to phase out at $178,001 and no deduction is allowed at $188,000 or more.
  • Married filing separately with no retirement plan at work, but your spouse has a workplace retirement plan: A partial deduction is allowed if modified AGI is $10,000 or less. No deduction is permitted with modified AGI of $10,000 or more.

Note that the above numbers are for 2013. The IRS has adjusted the numbers upward slightly for 2014 and these numbers can be found in PUB 590.

Roth IRA

Roth IRAs operate by a different set of rules. Because contributions are always on an after-tax basis, there is no question about deductibility. With Roth IRAs, however, your modified AGI can disqualify you from opening an account.

Here are the rules based on 2013 numbers:

  • Married filing jointly: Full Roth IRA contribution if modified AGI is $178,000 or less. The amount of your contribution limit begins to phase out at $178,001 and no Roth IRA contribution is allowed at $188,000 or more.
  • Single, head of household, or married filing separately and you did not live with your spouse at any time during the year: Full Roth IRA contribution permitted if modified AGI is less than $112,000 or less. The contribution limit begins to phase out at $112,000 and no contribution to a ROTH IRA is allowed at $127,000 or more.
  • Married filing separately and you lived with your spouse at any time during the year: A partial contribution is allowed if modified AGI is $10,000 or less. No contribution is permitted to a Roth IRA with modified AGI of $10,000 or more.
Published or Updated: April 21, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. David S. says:

    You forgot to talk about the non-deductible IRA (not Roth) that you can contribute towards and then convert to a Roth.

    • Rob Berger says:

      David, you are absolutely right! Thanks for mentioning that. I’ll put together a separate post on how this works, because my wife and I are following that strategy this month.

  2. Marcella says:

    My question is that I changed employment and I only contributed 1500 to a 401k at the old employment and I will not be eligible for a 401k in the new company until 2014. Can I contribute to a traditional IRA and deducted?

    • Rob Berger says:

      Marcella, just to be clear, will you be eligible for the company 401k in 2014 or 2015? If you have access to the 401k this year, that whether you can deduct contributions to an IRA will depend on your income and filing status. The information in the article should answer your question.

  3. Mark Whitaker says:

    How many Roth IRA’s can I open in my name?

    • Rob Berger says:

      Mark, I believe the issue isn’t the number of IRAs, but rather how much you can contribute each year. Total contributions can’t exceed the limt ($5,500 in 2014 + $1,000 for those 50 or older).

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