Can You Invest In Both and IRA And 401k
People have been asking can you invest in both an IRA and 401k and it can be confusing for those seeking answers to this and other retirement planning questions.
There are several differences between a 401k plan and an IRA, which stands for Individual Retirement Account. It may be a wise decision to seek the help of a professional retirement planner or financial planning expert who is qualified to explain all of the options available to you. Their knowledge and expertise on the matter of 401k versus IRA can be an invaluable asset to your making the right choice.
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. In 2009, the total amount that was allowed for an individual to contribute to an IRA was $5,000. For a 401(k) plan, you can typically invest up to 15% or your salary, or contribute no more than a max of $15,000 annually. The only caveat is that your employer not set a limit lower than that, which is possible. The benefit of having a 401k is that it is tax deferred so it will lower the amount of tax you pay, per each paycheck.
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.
An IRA, whether a SEP or ROTH is a whole different matter entirely. There are very minimal requirements for contributing to a 401k, as you don’t need to make much money in order to be able to benefit from certain tax deductions that are allowed by most funds of this type. You have to start to receive payments from your IRA after age 70 and there are stiff penalties for early withdrawals from such an account.
However you decide to invest, whether it is a traditional IRA or a 401k plan through your job, I would advise that you take this matter to a professional advisor who is an expert in financial and retirement planning so you are able to make a well informed decision.