If your 401k plan doesn't provide the fund diversity that you want, investigate other options. Individuals are allowed to make IRA and 401k contributions in the same year, but they must follow specific IRS guidelines. There are many IRAs to choose from, including deductible IRAs, non-deductible IRAs and Roth IRAs. After following a few simple steps, you'll be able to determine if making a contribution to an IRA and 401k is the right move for you.
Read the IRS rules on deducting your IRA. If your IRA isn’t deductible, it may make sense to try a Roth IRA because non-deductible IRAs only grow tax-deferred while Roth IRAs grow tax-free. Deductible and Roth IRAs are both tied to income limits that often change. As of 2010, the IRA maximum you may contribute to any IRA is $5,000, or $6,000 if you're 50 or older. IRAs are at least partially-deductible if you earn less than $109,000 adjusted gross income if you're married and filing jointly, and less than $66,000 if you're single. You may make a full Roth contribution if your AGI doesn't exceed $167,000 if you're married filing jointly, and $105,000 if single.
Ask your employer if have a 401k match. At the very least, you’ll want to contribute enough to receive the match from your employer. A match is free money given to you by your employer based on your contribution level. Company matching funds are often tied to longevity vesting schedules, so if you don’t plan to stay at your company for long, check out how long you have to remain for matching fund to become yours.
Make your IRA and 401k contributions. To make 401k contributions, you need to ask the human resource personnel at your workplace when you’re allowed to begin contributing to the plan. For IRA contributions, either send a check to your IRA provider or invest systematically through an automatic investment plan.
Contribute to IRA funds that supplement your 401k funds. If your 401k is weak in an area, use your IRA as a way to better diversify your portfolio. Use one of the many mutual fund screening sites online to see how your fund is diversified and to plan your IRA investments (see Resources). For both your 401k and IRA, if you’re using mutual funds, analyze the fund fees, manager tenure and fund track record against other similar investments.
Keep a record of your transaction to file accurate returns at tax time. If you deducted your IRA, place your contribution amount on line 32 of Form 1040, line 17 of Form 1040A or line 31 of Form 1040NR. Non-deductible contributions are accounted for by filing Form 8606. Roth IRA contributions don't need to be accounted for at tax time.