Ways To Save With Both: IRA and 401(k)


Retirement planning often comes down to a choice between a 401(k) and an IRA. Many individuals believe they can’t afford to do both at the same time. However, with a little planning, it may be possible to achieve coverage with both retirement accounts.

Take Advantage of a Company Matched 401(k)

Many employers offer a matching program for their full-time employees. This means for any contribution the employee makes to the company 401(k), the employer will match it up to a certain amount. Some will match contributions dollar for dollar, while others only match 50 cents on the dollar. Some will match dollar for dollar up to a certain percentage such as two or three percent of the employee’s gross annual income.

Even if the company only matches up to three percent, that is money that helps fund retirement planning. For an employee making $45,000 annually, that is $1,350 additional funds each year. 401(k) accounts are limited to $18,000 per year in 2016 for holders under 50, and company contributions do not count towards this total.

Set Up an IRA

At first, it is important to meet the requirements to gain the most out of company matching. Once that is fulfilled, any additional money the employee can spare for retirement planning should go to an IRA.

Unlike 401(k), there are a couple of different choices for IRAs, which depend on what the employee believes his or her tax bracket will be once retired. For those who believe their tax bracket will be lower at the time of withdrawal than at the time of contribution, a traditional IRA may be one to consider. A Roth IRA may be for those who are in a lower tax bracket at the time of contribution than they will be in at the time of withdrawal. IRAs also have a lower contribution cap: only $5,500 per year.

Making the Most of Both

Retirement planning can and should make the most out of both types of accounts. Since an IRA has a lower cap, it is easier to contribute to the fullest amount early on. Once that account is maxed out for the year, any funds originally being funneled here can be diverted back to the 401(k) as long as this fund is not also maxed out.

By maxing out both accounts, employees save approximately $23,500 each year for retirement. These investments grow, they may help to contribute to a comfortable retirement at the end of a career.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax-free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Scroll to Top