Contributing to an IRA and Roth IRA if You Already Have a 401K

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This is the kind of question I get fairly often and one that I actually had to recently sort out for myself. To determine if and how much you can contribute to multiple tax advantaged accounts you need to meet differing modified adjusted gross income (MAGI) limits and qualifications as discussed below. IRS tables and links to more detailed articles for all types of tax payers are also provided for your reference.

Contributing to a Traditional IRA

The maximum tax deductible IRA contribution (annual limit) for the latest tax year is $5,500 (or $6,500 if you are 50 or older). However to determine your tax deductible contribution limit, you need to consider your spouse’s (if applicable) and your own income levels in light of 7 key scenarios described below:

  1. If you are not covered by a retirement plan at your job (like a 401K or 403b) and your spouse is not covered by a retirement plan either, there is no MAGI limitation on your deductible contributions.
  2. If you are covered by a retirement plan at work, and your combined MAGI is $90,000 or less, there is also no limitation on your deductible contributions to a traditional IRA.
  3. If you are covered by a retirement plan at your job and your MAGI is more than $90,000 but less than $110,000, you are entitled to a partial deduction, reduced by 25% for every dollar over the lower limit (or 30% if over age 50), and rounded up to the nearest $10.  If the amount works out to less than $200, you are allowed to contribute at least $200.
  4. If you are covered by a retirement plan at your job and your MAGI is more than $110,000, you are not entitled to deduct any of your traditional IRA contributions in the applicable tax year.  You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.
  5. If you are not covered by a retirement plan at your job, but your spouse IS covered by a retirement plan, and your MAGI is less than $169,000, you can deduct the full amount of your IRA contributions.
  6. If you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $169,000 but less than $179,000, you are entitled to a partial deduction, reduced by 50% for every dollar over the lower limit (or 60% if over age 50), and rounded up to the nearest $10.  If the amount works out to less than $200, you are allowed to contribute at least $200.
  7. Finally, if you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $179,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2011.  You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.
2011 IRA MAGI Limits for Taxpayers with NO work sponsored retirement plans

IRA MAGI Limits for Taxpayers with NO work sponsored retirement plans (Source : IRS.gov)

2011 IRA with 401K

IRA MAGI Levels For Taxpayers WITH A Work Retirement Plan

To open a low cost and effective IRA account, consider using my recommended broker – TD Ameritrade – which has no account keeping fees and can be used for all types of IRA accounts.

Roth IRA

Similar to a traditional IRA, there are income limitations when it comes to contributing to a Roth IRA. For the current year the maximum Roth IRA contribution is $5,000 (or $6,000 if 50 and older):

  1. If your MAGI is less than $169,000, you are eligible to contribute the entire amount to a Roth IRA.
  2. If your MAGI is between $169,000 and $179,000, your contribution to a Roth IRA is reduced pro-ratably by every dollar above the lower end of the range, rounded up to the nearest $10.  If the amount works out to less than $200, you are allowed to contribute at least $200.
  3. If your MAGI is $179,000 or more, you cannot contribute to a Roth IRA.
  4. See this article for detailed limits and conversion rules related to Roth IRAs.

2011 Roth IRA Contribution and Income limits Chart

Remember: The maximum combined limit on contributions that you can make to a traditional or Roth IRA is the smaller of $5,000 ($6,000 for those 50 and older) or the amount of your taxable compensation for the current tax year. This limit can be split between a traditional and a Roth IRA but the combined limit is still $5,000 or $6,000 if you are above 50.

For more details, examples and worksheets I suggest you visit the IRS website and/or talk to your financial planner.

Leave a Reply

4 Comments on "Contributing to an IRA and Roth IRA if You Already Have a 401K"


Alex Roth
Friday 7:15 pm

What if you have a bank-based Roth IRA that only allows you to contribute to it once every year?

Gail
Wednesday 12:12 pm

Then you should contribute the maximum you can, once a year.

Emily
Monday 1:08 pm

Not appreciating that the Government is ultimately in charge of our retirement accounts, DH only contributes to the 401K as much as the company will match, and then we invest into regular mutual funds. Sure, we pay more in taxes, but it’s ours whenever we want it.

PoorFuture
Wednesday 11:04 am

Thanks for the info Andy, great reference. It’s ironic that an IRA plan can only be in the name of a single person, yet contribution to is tied to your martial status/income. I am a stay-at-home mom and this makes me completley reliant on my husdband’s retirment savings.

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