Having a company that sponsors a pension plan can help you diversify your retirement savings and take advantage of larger contribution limits. You can contribute to both your company pension and an individual retirement, but your deduction for your IRA contribution might be reduced or eliminated depending on your income.
The annual contribution limits for pensions and IRAs do not overlap, so contributing to one doesn't reduce your ability to contribute to the other. For example, if your pension contribution limit is $17,000 and your IRA contribution limit is $5,000, you could contribute the maximum amount to both for a total of $22,000 put away for retirement per year.
Traditional IRA Contributions
When you participate in a company pension plan, the IRS imposes income limits that restrict how much you can make before you can't deduct your traditional IRA contribution. For example, if the limit for your filing status is $70,000 and your modified adjusted gross income is $80,000, you can still contribute to a traditional IRA, but you can't deduct your contribution. The money still grows tax-free, and the contribution comes out tax-free, but your earnings will be taxable when you take distributions.
Roth IRA Contributions
Roth IRA contributions are unaffected by participation in a company pension plan because the contributions are never deductible. However, Roth IRAs do have income limits on who can make a contributions at all. If your modified adjusted gross income exceeds the limits, you can't put money directly in a Roth IRA. However, if your income is too high to deduct a contribution to a traditional IRA but low enough to contribute to a Roth IRA, you're better off putting the money in a Roth IRA because the contributions and earnings come out tax-free with qualified distributions.
Nondeductible Traditional IRA Contributions
If you can't contribute to a Roth IRA because your income is too high, you may be able to make a nondeductible contribution to a traditional IRA and then immediately convert it to a Roth IRA. This back door has the same net effect as contributing directly to a Roth IRA. However, if you already have a traditional IRA already with deductible contributions and earnings in it, you'll have to convert on a prorate basis, which means you can't just choose your nondeductible contributions to roll to a Roth IRA. For example, if after your nondeductible contribution, your traditional IRA has $5,000 of nondeductible contribution and $15,000 of deductible contributions and earnings, 75 percent of any conversion would be taxable.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."