Can I contribute to both a 401k and an IRA in the same year?

For those of you who haven’t yet tuned into my Women & Money podcast, you’re missing such a fantastic time. I am loving doing the show. And I can’t tell you how much I enjoy answering questions listeners are sending in.

Yes, yours truly answers the questions. And it makes me so happy to give people the advice they need to make powerful decisions with and for their money.

For the month of July, I am going to dedicate my weekly posts to questions I hear over and over.  Let’s get started with Question #1:

Can I contribute to both a 401(k) and an Individual Retirement Account (IRA) in the same year?

Answer: Yes!! You can contribute to both accounts up to their annual limits.

This year the contribution limits are:

401(k): $19,000 if you are younger than 50.

              $25,000 if you are at least 50.

IRA:      $6,000 if you are younger than 50.

             $7,000 if you are at least 50.

There is no income test for contributing to a 401(k). If your employer offers one, you get to participate. An IRA is a little bit trickier.

There are two types of IRAs: Traditional and Roth. You know I am a big believer that a Roth is the way to go. Money you save in a Roth can eventually be withdrawn in retirement without any taxes. That’s a big deal. (One rule is that your Roth account must be at least five years old before you can make tax-free withdrawals.)

The catch with a Roth is that there is an income test. If you are single and your modified adjusted gross income is below $122,000 or married and your joint tax return shows income below $193,000 you can contribute the full $6,000/$7,000 to a Roth. (If your income is higher you may come out ahead doing a backdoor-Roth IRA. I will cover that in another blog post.)

Okay, so now that you can contribute to both a 401(k) and an IRA, a popular follow up question is “Suze, what should I do first?”

Here’s what I want you to do…in THIS order:

1. If you have a 401(k) at work and you get a matching contribution from your employer, always contribute enough to get the maximum match.

2. Save in a Roth 401(k): Many 401(k)s now offer the chance to save in a Roth 401(k). It offers the same great tax break as a Roth IRA in retirement. Check if your employer plan has a Roth 401(k) option. If it does, and if the funds offered in the plan are low-cost index options, you can keep things simple: make it your goal to contribute $19,000 (or $25,000 if you are at least 50 this year.) If you have another $6,000 or $7,000 you want to save for retirement, then you can also save that much in a Roth IRA.

3. No Roth 401(k) option? That’s fine. Just contribute enough to the 401(k) to get the match and then focus your next $6,000/$7,000 on a Roth IRA, if you are eligible.

4. If you fully fund the Roth IRA and still can contribute more, then go back and contribute more to your 401(k).

It’s really that simple.