Personal Finance January 21, 2016

    Can you have a 401(k) and an IRA?

    Yes, although there are limits and other rules that affect the amount that can be contributed, as well as the amounts that are deductible.1

    Still, there is a case for having an individual retirement account (IRA) in addition to your 401(k), especially if you are able to make additional tax-deductible contributions, or your workplace plan has limited investment options. Here are a few points to consider:

    An IRA can be a good option after you gain your 401(k) company match. Before considering investing in another retirement account, make sure you are putting enough into your 401(k)—or other qualified employer plan, such as a 403(b) or 457—to maximize your employer’s matching contribution, assuming it offers one. Many employers will match 50 cents to a dollar for every dollar you contribute up to a set contribution limit, perhaps 3% to 6% of your salary.

    An IRA can offer additional tax benefits. Once you've secured your company match, it's time to consider whether you'd benefit from also contributing to a traditional or Roth IRA. Which to choose will depend on your situation. Here are a few guidelines:

    • If you're eligible to make a deductible contribution to a traditional IRA, consider putting your next $5,500—that's the IRA contribution limit for 2016—here.2 Even if you participate in a 401(k) plan, the IRS will allow you to deduct the entire contribution from your tax bill, provided your adjusted gross income is below $61,000 in 2016. However, deductibility phases out in stages beginning at $61,000, and disappears at $71,000.3
    • If you're not eligible to make a deductible contribution to a traditional IRA but you're eligible for a Roth IRA, consider putting your next $5,500 there.4 With a Roth IRA, you won't get an upfront tax deduction, but you will get tax-free growth, plus tax-free withdrawals beginning at age 59½ on qualified distributions.5 However, if you earn $132,000 or more in 20166 you will not be eligible to contribute to a Roth IRA.
    • If you're not eligible to make a deductible contribution to a traditional IRA, or to invest in a Roth IRA, you can choose to continue to contribute to your 401(k) until you have reached the tax-deferred contribution limit ($18,000 in 2016).7

    An IRA may offer more investment choices than your workplace plan. The average 401(k) plan offers 25 investment options, typically 13 equity funds, three bond funds and six target-date funds.8 But, within an IRA, your investment choices are much broader.

    The bottom line: Why not use all the savings and investing vehicles available to you, including both an IRA and 401(k), to save as much as you can, as early as you can—and, at the same time, get the maximum tax break for which you're eligible?

    How Schwab Intelligent Portfolios™ Can Help

    With Schwab Intelligent Portfolios, you can open various types of accounts including traditional or Roth IRAs. These accounts will be invested in low-cost, well-diversified portfolios of exchange-traded funds, with an asset allocation based on your goals, time horizon and risk tolerance.

    1. See IRS.gov for additional information.

    2. If you will be 50 or older at any point in 2016, you can make an additional catch-up contribution of $1,000 to a traditional IRA, for a total of $6,500.

    3. The AGI phase-out range for married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, is $98,000 to $118,000 in 2016. For an IRA contributor who is not covered by a workplace retirement plan but is married to someone who is covered, the deduction is phased out if the couple's income is between $184,000 and $194,000.

    4. If you will be 50 or older in 2016, you can make an additional catch-up contribution of $1,000 to a Roth IRA, for a total of $6,500.

    5. If you are under age 59½ you may also have to pay an additional 10% tax for early withdrawals unless you qualify for an exception.

    6. $194,000 for married couples filing jointly.

    7. If you will be 50 or older in 2016, you can make an additional catch-up contribution of $6,000 to a 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan, for a total of $24,000.

    8. Source: "The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans," BrightScope and Investment Company Institute, December 2014.

    This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager.

    (1215-B1M2)


    Was this article helpful?

    Next Steps

    1. Open an account
    2. Log in
    3. Learn more about Schwab Intelligent Portfolios®
    4. Tips for smart investing

    5. Contact a Schwab investment professional to discuss your goals:

    6. Live chat now
    7. Call us at 855-694-5208