Author Topic: 401(k) and IRA... Can I contribute to both?  (Read 4355 times)

GatewayTwo

  • 5 O'Clock Shadow
  • *
  • Posts: 35
  • Location: Ann Arbor, MI
401(k) and IRA... Can I contribute to both?
« on: July 31, 2015, 11:15:10 AM »
So the basic question is this:

I am currently working.  Mrs. GatewayTwo is at home with our kiddos.  I have a 401(k) through my employer, which I am working on maxing out.  But now I'm looking to the future:

Is it allowable for me to put the full 18k into my 401(k) AND the full 18(k) into my wife's IRA?  If both, is it all pre-tax (therefore reducing my AGI by 36k?) Or is this one of those either/or situations.  I've not found anywhere that really addresses it, and reading the actual IRS documentation makes my brain melt.

Implicitly understood is that any responses are opinions and not the actual regulations as they might be enforced by the US Gov't.

johnny847

  • Magnum Stache
  • ******
  • Posts: 3196
    • My Blog
Re: 401(k) and IRA... Can I contribute to both?
« Reply #1 on: July 31, 2015, 11:18:11 AM »
You can simultaneously max a 401k and an IRA, but the IRA max is $5500, not $18k

rubybeth

  • Handlebar Stache
  • *****
  • Posts: 1401
  • Location: Midwest
Re: 401(k) and IRA... Can I contribute to both?
« Reply #2 on: July 31, 2015, 11:26:15 AM »
Is your wife employed? Do you file a joint return? I ask because you can only contribute earned income to an IRA *unless* you file jointly, then she can also have an IRA even if she doesn't have income, and the max is currently $5,500/year.

If you file jointly, you can *each* have an IRA, and you can have your 401k, so you could max out both IRAs ($11,000 total) plus the $18,000 to 401k. It could all be deductible for your taxes as long as it's a traditional IRA and traditional 401k and not a Roth version of either. Reducing your AGI would be great, if you've got two kids, you may not pay much at all in taxes. Nice! :)

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

GatewayTwo

  • 5 O'Clock Shadow
  • *
  • Posts: 35
  • Location: Ann Arbor, MI
Re: 401(k) and IRA... Can I contribute to both?
« Reply #3 on: July 31, 2015, 11:44:06 AM »
Awesome, thanks!

So, we do file jointly.  The goal is to not pay much tax at all, and to max out the investments instead.

I had thought the 5,500 limit was for the ROTH only, but that is for all IRAs.  Good to know.

This is why I love this forum.  I had been searching for DAYS trying to figure out the answer and you all know it in like 30 seconds :)  +1 for all of you.

Frankies Girl

  • Magnum Stache
  • ******
  • Posts: 2901
  • Age: 81
  • Location: The laboratory
  • Typical Ghoul Next Door
Re: 401(k) and IRA... Can I contribute to both?
« Reply #4 on: July 31, 2015, 11:52:38 AM »
You can also have an IRA too... so you could max your 401k, max an IRA for yourself (5,500 total), and then do a spousal IRA for your wife (5,500 total), for a grand total of $29K.

Just keep in mind that you have a choice on the type of IRA: traditional or Roth. So you'd need to decide which one works for your situation for both of you.
« Last Edit: July 31, 2015, 11:55:09 AM by Frankies Girl »

Left

  • Handlebar Stache
  • *****
  • Posts: 1159
Re: 401(k) and IRA... Can I contribute to both?
« Reply #5 on: July 31, 2015, 12:24:16 PM »
you can max both but the $18000 tax deferment limit is both combined I think, no point doing both a 401k and IRA since you cant defer $18k + $5500

it's why people do a roth ira + max 401k... I'd say you could do roth 401k and tIRA but it makes so sense to tax defer just $5.5k instead of $18k if that was your goal. If I'm mistaken about this, please let me know :D

I don't know how your wife would figure into this :S single guy here so it was never something I looked into.
« Last Edit: July 31, 2015, 12:33:32 PM by eyem »

johnny847

  • Magnum Stache
  • ******
  • Posts: 3196
    • My Blog
Re: 401(k) and IRA... Can I contribute to both?
« Reply #6 on: July 31, 2015, 01:12:46 PM »
you can max both but the $18000 tax deferment limit is both combined I think, no point doing both a 401k and IRA since you cant defer $18k + $5500

it's why people do a roth ira + max 401k... I'd say you could do roth 401k and tIRA but it makes so sense to tax defer just $5.5k instead of $18k if that was your goal. If I'm mistaken about this, please let me know :D

I don't know how your wife would figure into this :S single guy here so it was never something I looked into.

No, you can simultaneously max an IRA and a 401k. So you can contribute $18k + $5500. And that $5500 to the IRA can be to a Roth or traditional IRA, it doesn't matter (so long as you don't hit the income limit for Roth IRA contributions).


Is your wife employed? Do you file a joint return? I ask because you can only contribute earned income to an IRA *unless* you file jointly, then she can also have an IRA even if she doesn't have income, and the max is currently $5,500/year.

If you file jointly, you can *each* have an IRA, and you can have your 401k, so you could max out both IRAs ($11,000 total) plus the $18,000 to 401k. It could all be deductible for your taxes as long as it's a traditional IRA and traditional 401k and not a Roth version of either. Reducing your AGI would be great, if you've got two kids, you may not pay much at all in taxes. Nice! :)

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

Not necessarily. If you make too much and either you or your spouse are covered by a retirement plan at work (ie, 401k), you can't deduct tIRA contribtuions
The tIRA has this property where you can contribute up to the max regardless of your income, but your deduction may be limited based on income and coverage of a retirement plan at work.


GatewayTwo, reading IRS documentation is not hard. You just need to keep an open mind when you read it.

rubybeth

  • Handlebar Stache
  • *****
  • Posts: 1401
  • Location: Midwest
Re: 401(k) and IRA... Can I contribute to both?
« Reply #7 on: July 31, 2015, 01:18:26 PM »
you can max both but the $18000 tax deferment limit is both combined I think, no point doing both a 401k and IRA since you cant defer $18k + $5500

it's why people do a roth ira + max 401k... I'd say you could do roth 401k and tIRA but it makes so sense to tax defer just $5.5k instead of $18k if that was your goal. If I'm mistaken about this, please let me know :D

I don't know how your wife would figure into this :S single guy here so it was never something I looked into.

No, you can simultaneously max an IRA and a 401k. So you can contribute $18k + $5500. And that $5500 to the IRA can be to a Roth or traditional IRA, it doesn't matter (so long as you don't hit the income limit for Roth IRA contributions).


Is your wife employed? Do you file a joint return? I ask because you can only contribute earned income to an IRA *unless* you file jointly, then she can also have an IRA even if she doesn't have income, and the max is currently $5,500/year.

If you file jointly, you can *each* have an IRA, and you can have your 401k, so you could max out both IRAs ($11,000 total) plus the $18,000 to 401k. It could all be deductible for your taxes as long as it's a traditional IRA and traditional 401k and not a Roth version of either. Reducing your AGI would be great, if you've got two kids, you may not pay much at all in taxes. Nice! :)

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

Not necessarily. If you make too much and either you or your spouse are covered by a retirement plan at work (ie, 401k), you can't deduct tIRA contribtuions
The tIRA has this property where you can contribute up to the max regardless of your income, but your deduction may be limited based on income and coverage of a retirement plan at work.


GatewayTwo, reading IRS documentation is not hard. You just need to keep an open mind when you read it.

Right, I know it's not always all deductible, which is why I said it "could be" deductible, depending on income. Sorry that wasn't clear, thanks for clarifying for the OP.

And eyem is wrong. It's not $18,000 total between IRA and 401k. It's $18,000 max for 401k, and $5,500 max for an IRA.

Just to throw this out there, if you also have access to a HDHP (high deductible health plan), you'd also qualify to put money into an HSA (health savings account), which is also tax advantaged. And, some employers offer a couple types of retirement accounts: 403k or 457b are common, and if you have both (or one of these plus a 401k), you can contribute $18,000 to each account.

johnny847

  • Magnum Stache
  • ******
  • Posts: 3196
    • My Blog
Re: 401(k) and IRA... Can I contribute to both?
« Reply #8 on: July 31, 2015, 01:23:26 PM »
you can max both but the $18000 tax deferment limit is both combined I think, no point doing both a 401k and IRA since you cant defer $18k + $5500

it's why people do a roth ira + max 401k... I'd say you could do roth 401k and tIRA but it makes so sense to tax defer just $5.5k instead of $18k if that was your goal. If I'm mistaken about this, please let me know :D

I don't know how your wife would figure into this :S single guy here so it was never something I looked into.

No, you can simultaneously max an IRA and a 401k. So you can contribute $18k + $5500. And that $5500 to the IRA can be to a Roth or traditional IRA, it doesn't matter (so long as you don't hit the income limit for Roth IRA contributions).


Is your wife employed? Do you file a joint return? I ask because you can only contribute earned income to an IRA *unless* you file jointly, then she can also have an IRA even if she doesn't have income, and the max is currently $5,500/year.

If you file jointly, you can *each* have an IRA, and you can have your 401k, so you could max out both IRAs ($11,000 total) plus the $18,000 to 401k. It could all be deductible for your taxes as long as it's a traditional IRA and traditional 401k and not a Roth version of either. Reducing your AGI would be great, if you've got two kids, you may not pay much at all in taxes. Nice! :)

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

Not necessarily. If you make too much and either you or your spouse are covered by a retirement plan at work (ie, 401k), you can't deduct tIRA contribtuions
The tIRA has this property where you can contribute up to the max regardless of your income, but your deduction may be limited based on income and coverage of a retirement plan at work.


GatewayTwo, reading IRS documentation is not hard. You just need to keep an open mind when you read it.

Right, I know it's not always all deductible, which is why I said it "could be" deductible, depending on income. Sorry that wasn't clear, thanks for clarifying for the OP.

And eyem is wrong. It's not $18,000 total between IRA and 401k. It's $18,000 max for 401k, and $5,500 max for an IRA.

Just to throw this out there, if you also have access to a HDHP (high deductible health plan), you'd also qualify to put money into an HSA (health savings account), which is also tax advantaged. And, some employers offer a couple types of retirement accounts: 403k or 457b are common, and if you have both (or one of these plus a 401k), you can contribute $18,000 to each account.

Yea I agree with you eyem is wrong, as I said earlier.

Your'e wrong about the bolded part though. You can't simultaneously max both a 403b (it's a b, not a k - not that there's any real logic to this, but it is what it is) and a 401k. Their limits are combined.
Quote
The amount of salary deferrals you can contribute to retirement plans is your individual limit each calendar year no matter how many plans you're in. This limit must be aggregated for these plan types:
401(k)
403(b)
SIMPLE plans (SIMPLE IRA and SIMPLE 401(k) plans)
SARSEP

However, you can max (401k OR a 403b) AND (457b).
Quote
If you’re in a 457(b) plan, you have a separate limit that includes both employee and employer contributions.

des999

  • Stubble
  • **
  • Posts: 180
Re: 401(k) and IRA... Can I contribute to both?
« Reply #9 on: July 31, 2015, 01:32:19 PM »
I think someone may have already mentioned it, but if you have an HSA option, max that out, for a family it is usually around ~6k.  That is all pretax as well.


jooles

  • Stubble
  • **
  • Posts: 135
Re: 401(k) and IRA... Can I contribute to both?
« Reply #10 on: July 31, 2015, 01:33:26 PM »
Every question about IRAs answered here

http://www.irs.gov/publications/p590a/ch01.html#en_US_2014_publink1000230381

From Table 1-2. Effect of Modified AGI1 on Deduction if You Are Covered by a Retirement Plan at Work

    If you are covered by a retirement plan at work your modified AGI affects the amount of your deduction.    If you make $96k and under you get the full deduction up to a max contribution limit for that year.  If you make more than 96K, but less than $116k you may only take a partial deduction.  If you make over $116k you get no deduction for your IRA contribtution.




TomTX

  • Magnum Stache
  • ******
  • Posts: 3332
  • Location: Texas
Re: 401(k) and IRA... Can I contribute to both?
« Reply #11 on: July 31, 2015, 02:02:09 PM »
you can max both but the $18000 tax deferment limit is both combined I think, no point doing both a 401k and IRA since you cant defer $18k + $5500

it's why people do a roth ira + max 401k... I'd say you could do roth 401k and tIRA but it makes so sense to tax defer just $5.5k instead of $18k if that was your goal. If I'm mistaken about this, please let me know :D

Nope. High income may prevent having the IRA contribution reduce your taxes, thus the Roth (or backdoor Roth).

...but that's not the case for the OP, who isn't even close to the limits.

One suggestion for the OP: Don't go below the 10% bracket by putting money in an IRA. Do some Roth instead.

Standard deduction is $12,600. 4 Personal Exemptions (2 adults, 2 kids) @ $4000 = $16,000. So, the first $38,600 is ZERO tax. Taking your income down to $36k is pointless. Put the extra $2600 in a Roth.


Jack

  • Magnum Stache
  • ******
  • Posts: 4734
  • Location: Atlanta, GA
Re: 401(k) and IRA... Can I contribute to both?
« Reply #12 on: July 31, 2015, 02:08:15 PM »
One suggestion for the OP: Don't go below the 10% bracket by putting money in an IRA. Do some Roth instead.

Standard deduction is $12,600. 4 Personal Exemptions (2 adults, 2 kids) @ $4000 = $16,000. So, the first $38,600 is ZERO tax. Taking your income down to $36k is pointless. Put the extra $2600 in a Roth.

This advice is helpful, but incomplete: in that situation, it's also important to pay attention to the Saver's Credit.

Mirwen

  • Stubble
  • **
  • Posts: 160
  • Location: Las Vegas
Re: 401(k) and IRA... Can I contribute to both?
« Reply #13 on: July 31, 2015, 06:52:47 PM »


Nope. High income may prevent having the IRA contribution reduce your taxes, thus the Roth (or backdoor Roth).

...but that's not the case for the OP, who isn't even close to the limits.

One suggestion for the OP: Don't go below the 10% bracket by putting money in an IRA. Do some Roth instead.

Standard deduction is $12,600. 4 Personal Exemptions (2 adults, 2 kids) @ $4000 = $16,000. So, the first $38,600 is ZERO tax. Taking your income down to $36k is pointless. Put the extra $2600 in a Roth.
[/quote]

As Jack pointed out, it would be very easy to get down to the 50% saver's credit level.  That can result in about a $1000 credit which should wipe out all taxes.  Also if they have kids, they would increase their earned income credit by using traditional.  The return on traditional for low income folks can exceed 40% because of these credits.

MDM

  • Walrus Stache
  • *******
  • Posts: 9243
Re: 401(k) and IRA... Can I contribute to both?
« Reply #14 on: July 31, 2015, 08:11:50 PM »
As Jack pointed out, it would be very easy to get down to the 50% saver's credit level.  That can result in about a $1000 credit which should wipe out all taxes.  Also if they have kids, they would increase their earned income credit by using traditional.  The return on traditional for low income folks can exceed 40% because of these credits.

Yep, the US tax code can be quite the convoluted thing.  The table below is for a family of 4 (MFJ w/ 2 young kids) with $66K/yr gross income.  It shows the total (federal + state + SS + Medicare) annual tax as the traditional 401k contribution goes from $0/mo to $3000/mo (aka $36K/yr, the maximum if both work and have access to one 401k-like plan each).  Comes from cells K35:N46 in the case study spreadsheet.

Oh, and state tax was assumed to be 0% and SS and Medicare don't change at all, so all the changes are due to changes in federal tax.  So although at first glance this family appears to be in the 15% marginal bracket, they can actually save ~25% if they can afford the full contribution.  Of course this is one of a practically infinite number of possible scenarios, so one should always look at one's individual situation.


401k cont.Total TaxIncrementalCumulative
SavingsSavings
$0 $7,737
$300 $7,19715.0%15.0%
$600 $6,25726.1%20.6%
$900 $5,71715.0%18.7%
$1,200 $5,17715.0%17.8%
$1,500 $4,22126.6%19.5%
$1,800 $3,05532.4%21.7%
$2,100 $1,93731.1%23.0%
$2,400 $41942.2%25.4%
$2,700 -$39922.7%25.1%
$3,000 -$1,15721.1%24.7%