Investing in IRA and 401k in the Same Year Is Allowed
There is a maximum contribution limit for 401k accounts. There is also a maximum allowable contribution into an IRA account. However, the two numbers are not related.
An investor may make the maximum allowable 401k contribution in each year and also make the maximum allowable IRA contribution each year with no tax penalty. In other words, contributing to an IRA and 401k in the same year is allowed. Not only that, but it is a great idea if you have enough extra income to do it.
The one caveat is that the maximum contribution to an IRA is not a separate number from the maximum contribution to a Roth IRA. The total amount that can be contributed to any IRA account for 2010 and 2011 is $5,000. There is also a catch-up contribution allowed for taxpayers who are over the age of 50 years old. However, a person's IRA contribution limit is the total aggregate contribution limit for all IRA accounts, regardless of type. In other words, you can only contribute $5,000 total to both your IRA account and your Roth IRA account.
This IRA contribution maximum can be split between IRA accounts so long as the total does not exceed the annual limit. For example, an investor could contribute $3,000 to a traditional IRA and $2,000 to a Roth IRA, but not $3,000 to each. The same investor may also contribute the annual maximum contribution to their 401k account. In this example, the person could invest $3,000 in the traditional IRA, $2,000 in the Roth IRA, AND the full allowable amount into their 401k.
The same applies for any catch-up contribution amounts for a single IRA account holder.