Can You Max Out an Employer's Retirement Plan & Also Open an IRA?

Investing for retirement can be confusing, with all of the different types of accounts available. If that weren't complicated enough, traditional IRAs, Roth IRAs, 457s, 403(b)s, and 401(k) accounts all have their own IRS rules and regulations to comply with. In order to maximize your ability to fund your retirement savings objectives, it may be necessary to invest money for retirement in more than one place. Fortunately, you can max out an employer's retirement plan and also contribute to an IRA account.

Types

• IRA accounts, or individual retirement arrangements, are personal accounts opened, funded and managed by a single taxpayer. There are two main types of IRAs: a Roth IRA and a traditional IRA.

  401(k) plans, 403(b), and 459 plans, on the other hand, are employer-sponsored retirement plans that can only be set up by businesses. They are typically funded by a combination of employee contributions. Some companies may also contribute money to an employee's 401(k) account in the form of matching or profit sharing.

Benefits

• IRA accounts and 401(k) plans offer people a way to save for retirement while reducing the amount of taxes that would typically be paid on savings and investments. Both IRAs and 401(k)s defer all taxes for interest and gains while the funds are inside the account. 401(k) plans can be funded with pre-tax dollars, which means that the investments are made tax-free. Traditional IRA contributions are deductible for taxpayers who meet the eligibility requirements. Roth IRA contributions are not tax-deductible.

Size

• IRA accounts and 401(k) plans have maximum contribution limits. The maximum contribution to a 401(k) plan is $16,500 per year. Taxpayers over the age of 50 can make a catch-up contribution to a 401(k) of up to $5,000. The maximum contribution that can be made to IRAs is $6,000 per year, with a $1,000 catch-up contribution for those over 50.

Misconceptions

• Although both IRA accounts and 401(k) accounts have limits on how large contributions can be each year, there is actually no relationship between those limits. A taxpayer may contribute the maximum to both. Therefore, a person could max out his employer-sponsored retirement plan and also open an IRA and contribute any amount up to the IRA contribution limit.

Potential

• While there is no relationship between employer sponsored retirement plan contributions and IRA contributions, deductible contributions to a traditional IRA may be limited based upon a person's income. For taxpayers close to the income limits, additional pre-tax contributions to an employer-sponsored retirement plan like a 401(k) might reduce the overall income enough to allow for greater deductible contributions to a traditional IRA.