Double Duty on Retirement? IRA & 401(k) Contributions Explained 

Should you be fortunate enough to have access to a 401(k) via your employment, you must decide whether to deposit funds into an IRA, your workplace plan, or both. There are benefits to dividing your funds throughout many accounts, since each one has advantages and disadvantages.

While most workers won't have any issues accomplishing this, high incomes may find things to be a bit more challenging. Before you make contributions to an IRA and 401(k) in the same year, here are several things you should be aware of.

Contributing to 401K and IRA at the Same Time

In 2024, most workers can contribute up to $23,000 (or $30,500 if they are 50 years of age or older) to a 401(k). They can also save up to $7,000 in an IRA or $8,000 if they're 50 or older. Remember that these restrictions are applicable to each and every one of your accounts. For instance, the maximum amount you may contribute to all of your IRAs this year is $7,000. Each IRA in your name cannot have an addition of $7,000.

Contributions to a standard 401(k) and an IRA often lower your annual taxable income. You consent to paying taxes on your future withdrawals in exchange. Unlike Roth IRAs and 401(k)s, where you may take advantage of tax-free withdrawals throughout retirement, you pay taxes on your contributions up front in these accounts.

However, the ability to contribute to a conventional IRA with a tax deduction isn't always available to high incomes. This may lower their deductible IRA contribution limit or prevent them from making any deductible contributions at all if they or their spouse are enrolled in a workplace retirement plan and their income is high enough.

If, however, your salary prevents you from deducting your conventional IRA contributions, don't give up. Nondeductible contributions are still accepted up to the yearly cap. Similar to contributions to a Roth IRA, you pay taxes on these upfront.

Your income isn't tax-free, though. They grow tax-deferred, so when you take money out in retirement, you won't owe the government anything.

Nondeductible IRA Contributions

Contributions to nondeductible IRAs might still be beneficial even though they may complicate your tax situation. You won't have to worry about paying taxes on your gains until you take the money out, and your contributions will grow tax-free.

Some opt to use their nondeductible contributions to finance a backdoor Roth IRA. Because of this, you can convert your investments to Roth funds even if your annual income is more than the maximum allowed by the Roth IRA. Once you've completed this and paid taxes on your converted funds, your profits increase tax-free.

If nondeductible contributions sound too confusing, you might want to completely avoid them. To begin with, you may decide to just make contributions to your employer's retirement plan.

If you would want to contribute more than what your 401(k) would allow, you can fund a health savings account (HSA) with additional funds. Even while these accounts aren't meant for retirement savings, they may still be excellent places to keep these monies, particularly if you invest them.

Remember that in the upcoming years, there will probably be increases to both the retirement account contribution limits and the income limitations for making deductible IRA contributions. So, before you put any money aside for retirement, always find out what they are and how much they add up to compared to your expected annual income.