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Can You Invest In IRA and 401k Both at the Same Time

written by: Brian Nelson•edited by: Rebecca Scudder•updated: 3/18/2011

Looking to sock away a little extra money for retirement? Looking for a way to save on taxes by investing more retirement money? How about investing in both an IRA account and a 401k plan?

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    Can You Invest In Both a 401k and an IRA Account At The Same Time?

    Investing in a 401k plan through your employer is a great deal. All funds invested in a 401k are not taxed. They are made with pre-tax dollars which means that not only does the taxpayer not pay any taxes on contributions made to a 401k plan, but that income does not count against the limits on deductions and tax credits that have income based phase-outs such as the deduction for student loan interest and some of the child tax credits. Lowering your overall income in this manner can mean huge tax savings.

    Investing in an IRA account is a good idea too. For many taxpayers, contributions made to a traditional IRA are tax deductible. Even if you make too much money to deduct your IRA contributions -- Want to know how to tell if your IRA contribution is deductible? -- money invested in an IRA still grows tax-deferred. There is also always the option to contribute to a Roth IRA as long as your income isn't doesn't exceed the Roth IRA income limits.

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    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.