Most taxpayers understand the benefits to be gained by contributing to a tax preferred retirement account. But many individuals are faced with a choice of where they should direct their retirement contributions each year. After all, anyone with earned income is eligible to open an IRA, and many individuals also have the option of opening a 401(k) account through their employer.
Here are some tips for helping you decide whether to contribute to your 401(k) plan, to your IRA, or to both accounts.
Are You Eligible to Contribute to Both?
The first step in your analysis should be to check whether you are actually able to contribute to both a 401(k) and an IRA this year. This will depend upon the type of IRA you would like to contribute to, and your modified adjusted gross income for the year. For example, if you are a married taxpayer who filed a joint return and you want to contribute to a Roth IRA. then your income needs to be less than $178,000 in order to make the full contribution. (A partial contribution can be made if your income is between $178,000 and $188,000.) Different income thresholds apply for single taxpayers who want to make contributions to a Roth account.
A taxpayer covered by a 401(k) at work can generally make a full contribution to their traditional IRA, even if they are covered by a 401(k) plan at work. The issue for these taxpayers to consider is whether those contributions will be tax deductible in the tax year they are made.
Are Your Traditional IRA Contributions Tax Deductible?
Contributions to a traditional IRA will be deductible, even if the taxpayer is covered by a 401(k) plan at work, if the taxpayer’s income is $95,000 or less (in the case of a married taxpayer filing jointly), or $59,000 or less (in the case of a single taxpayer). Partial contributions may be made to a traditional IRA for incomes that are slightly higher.
It’s worth noting that a taxpayer who elects not to be covered by a 401(k) plan at work can make full contributions to a traditional IRA at significantly higher income levels. A married taxpayer who files jointly can make a full contribution with an income up to $178,000, while a single taxpayer not covered by a 401(k) plan can make a full contribution to a traditional IRA regardless of their income levels.
In light of the fact that a self-directed IRA with a custodian such as Quest Trust Company can provide a wider range of investment options, an investor who only has $5,000 to set aside for their retirement savings may well choose to forego the 401(k) plan contributions and direct all their funds to their self-directed IRA. An investor with additional funds available to save for retirement can contribute to both accounts. in accordance with the annual IRS income limitations.