A 401(k) plan at work lets you stash part of your pre-tax salary in a tax-deferred retirement account. Your employer may add money as well so your retirement savings pile up faster. Maybe you want to save more than 401(k) contribution limits permit. With a traditional or Roth individual retirement account, you can do just that. Your 401(k) plan may affect the tax status of your IRA contributions, but there’s no rule that says you can’t have both.
Adding to IRAs
In 2013, the IRS upped the annual contribution limit for IRAs from $5,000 to $5,500. People age 50 and over can add an extra $1,000. The limit applies to the total for all traditional and Roth IRA accounts combined, not to each account separately. IRA contribution limits are entirely separate from limits that apply to 401(k) plans. The limit for 401(k) contributions is $17,500 as of 2014 for employees, plus another $5,500 for someone who is age 50. An employer has the option of matching what an employee puts in her 401(k) with up to $32,500. You can add the maximum to your 401(k) and still tuck away the maximum IRA contribution as well.
Participation in a 401(k) where you work won’t bar you from stashing more money into a traditional IRA. However, the amount of IRA contributions you can take off your taxable income may be reduced. Once your adjusted gross income reaches a level that depends on your marital status, the deduction starts to go down or phase out. When your income tops a second, higher figure, you can’t deduct any of the money you put into a traditional IRA. You still get to add cash to the traditional IRA. You just don’t get a tax break on the contribution.
The IRS adjusts IRA phase-out thresholds annually. As of 2014, if you were single and had a 401(k) or other tax-deferred retirement plan at work, you started to lose your deduction when your adjusted gross income reached $60,000. At $70,000, the deduction phased out completely. If you were married and filed a joint return, the phase-out range was $96,000 to $116,000. Filing as married but separate cut the allowed income for deducting traditional IRA contributions to zero to $10,000. If you weren’t covered, but your spouse was, the range was $181,000 to $191,000. When a job doesn’t provide a retirement plan, there is no deduction phase-out for a traditional IRA.
About Roths and Rollovers
Roth IRAs also have phase-out rules. The Roth phase-out reduces the amount you can contribute. However, the Roth phase-out is determined only by your adjusted gross income and marital status. Having a 401(k) has no effect. You can also transfer or roll over any amount of money from a 401(k) or other tax-deferred retirement plan into a traditional or Roth IRA. Rollovers aren’t considered contributed funds, so the limits and phase-out rules don’t apply. If you move cash from a 401(k) into a Roth, you may have to pay taxes on the transferred funds.
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