The 401k is a workplace retirement account and the IRA is an individual retirement account. If you already have a 401k, you can still open an IRA and contribute to both accounts. In fact people are always encouraged to open an IRA in order to supplement the retirement plan offered by the employer. It’s not only a great way to increase retirement savings but also allows you to get certain tax advantages when it’s time to retire.
Why open IRAs
Having your 401k alone is simply not enough. You can always open an IRA in order to access more investment options which are not present in your workplace retirement account. With a traditional or Roth IRA, you are able to make contributions and earn tax benefits. A traditional IRA allows you to contribute pretax dollars and pay taxes when you are making withdrawals later in the future whereas a Roth IRA allows you to withdraw money without paying any taxes.
If you own both a 401k as well as an IRA, beware of certain contribution limits that hold. While you are allowed to contribute to both accounts, the total amount of contribution per tax years should not exceed a certain threshold set by the IRS. As at 2014, the limit was set at $5,500 which means you are not allowed to contribute more than this per tax year. There are also limits that are placed in each type of IRA.
Are you eligible for an IRA?
Eligibility will be determined by the type of IRA. For instance, anyone can open a traditional IRA but the contributions can only be made until the age of 70 ½. For the Roth IRA, individuals are only eligible to open if they have an annual gross income of $127,000 and $188,000 for couples (check the investment elegibility for a gold IRA here). These limits were set by the IRS in 2013 but the amount is likely to increase in future. For the traditional 401k, you must be working for an employer who offers this form of retirement plan. Roth IRAs do not have income limits but you have to work for an employer who offers the 401k in order to qualify for one.
Before you choose to contribute to both IRA and 401k, understand the taxes, penalties and contributions that are required. You also need to know that there are certain maintenance charges which you have to pay the custodian when it comes to an IRA.