Can an Employee Make Contributions to Both a 401(k) & an IRA?

Specific rules apply to every retirement plan receiving special tax treatment from the IRS.

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The Internal Revenue Service offers taxpayers a variety of tax-favored options for retirement savings. Contributing to one type of plan does not necessarily prohibit contributing to a different type of plan. For example, you can contribute to both a 401(k) plan and an IRA, as long as you follow the guidelines for each type of program.

401(k) Taxation

If you choose to have your employer contribute a certain amount of your salary to a 401(k) plan rather than pay the money directly to you, your contributions are normally exempt from income tax withholding. However, your contributions are not exempt from Medicare and Social Security taxes. The IRS considers your contributions to a 401(k) plan as elective deferrals, and as such, certain limits apply.

Elective Deferrals

The IRS places an upper limit on your total elective deferrals during a single tax year. Included are your contributions to a 401(k) plan, the federal Thrift Savings Plan, SARSEP accounts and tax-sheltered 403(b) annuity plans. The limit changes periodically, but for 2011, you could not defer more than $16,500 in total to these four plans.

Traditional IRA Rules

To contribute to a traditional IRA, you must be below the age of 70.5 years at year-end and have taxable earned income for the year. Compensation includes your salary, bonuses, income from self-employment, professional fees and commissions, and -- if taxable -- separate maintenance and alimony payments received. You can contribute a maximum of $5,000 or your total annual compensation, whichever is less; if you are over the age of 50, the limit is $6,000 or your total compensation, whichever is less. If you are covered by a retirement plan from your employer, you can still contribute up to the limits, but your deduction is reduced as your income increases. As an example, married couples filing a joint return cannot claim a deduction if their adjusted gross income is at least $110,000 and both are covered by an employer plan. If only one spouse is covered, they cannot take the deduction if adjusted gross income exceeds $179,000.

Roth IRAs

Your contributions to a Roth IRA are not tax-exempt, but if you qualify, your distributions are not subject to taxation. Your income must be below certain limits to contribute to a Roth IRA. For married couples who file a joint return, adjusted gross income cannot exceed $179,000, for example. The maximum contribution is $5,000, or $6,000 if you are at least 50 years of age. You must reduce your contributions to a Roth IRA by any contributions you made to a traditional IRA.

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About the Author

Jeffrey Joyner has had numerous articles published on the Internet covering a wide range of topics. He studied electrical engineering after a tour of duty in the military, then became a freelance computer programmer for several years before settling on a career as a writer.

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