Should You Have Both an IRA and a 401(k)?

You already know it’s important to save for retirement. How much you need to save is a topic unto itself, but just as crucial for your savings goals are the tools you’ll need to get there.

When it comes to retirement savings, there are two basic options: A self-contributed individual retirement account, or IRA, and an employer-sponsored 401(k). But it’s not an either/or situation - you can have both. But should you?

The answer is dependent on your unique situation, but there’s a good case to be made for taking advantage of the tax-saving features that come with both an IRA and a 401(k).

The Pros and Cons of an IRA

Most retirement accounts allow you grow your earnings by investing the funds you contribute, and the options for an IRA are nearly limitless. You can buy stocks, mutual funds, ETFs, bonds, or even something less risky like CDs.

The downside, though, is that the annual contribution you can make to an IRA is much lower – for 2023 it’s $6,500 if you’re younger than 50 or $7,500 if you’re older and doing catchup contributions.

There’s an added bonus of tax deductibility that can come with an IRA, but only if you meet modified adjusted gross income requirements. This can change, so it’s important to consult a tax advisor before opening an IRA.

The Pros and Cons of a 401(k)

If you work for a company, there’s a good chance they provide a 401(k) retirement savings plan. The annual contribution limit for a 401(k) is much higher than an IRA – this year it’s set at $22,500 if you’re younger than 50 or $30,000 if you’re older than 50.

If your employer provides matching contributions, typically somewhere between 3-6%, then taking advantage of this and at least contributing the maximum matchable amount if you’re able is certainly in your best interest to truly maximize your earning potential.

Options for investing your 401(k) funds can suffer from narrow plan limitations and sometimes higher management fees, but these vary depending on the brokerage firm your company partners with to provide employees with 401(k) retirement plans. Your HR department can likely help you with these questions, or at least point you in the direction of who can.

The Pros and Cons of Utilizing Both Simultaneously

Both account types can help you reach your retirement goals, but whether to use them in tandem depends on your situation.

Start by at least meeting the maximum annual 401(k) contribution level set by your employer. After that, if you find the investment options are too limiting, consider contributing additional funds to an IRA.

If you’re putting money in both, the tax deductibility of your IRA contributions may be limited or prohibited based on your annual earnings, but the combination of these accounts can still boost your retirement savings until you’re ready to use them. A tax advisor can help you understand any tax implications of the accounts.

Final Verdict

At the end of the day, deciding if you want to use both accounts together is dependent on your individual situation as there can be limitations. But you should rest easy knowing that either one is a powerful savings tool designed for long-term wealth building. Research the different options available to you and consult your tax advisor to see what kind of strategy can make your retirement dreams a reality.

If you’d like to explore the differences between an IRA and a 401(k) in even greater detail, check out this article we published that can help you decide which is right for you.

OMB and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decision. Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. This material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy.