Investing Should I Have Both a 401(k) and an IRA?

If you can, yes. Find out how to use both retirement savings vehicles to fund your golden years.

By Mandi Woodruff-Santos Illustration by Kirsten Ulve
PUBLISHED 01/04/2023 | 3 MINUTES

These handy tools for long-term investing both have their benefits and should be taken advantage of. Knowing which one to use and when, however, is the tricky part. For most workers, it typically makes sense to focus on your 401(k) first, especially if your employer offers a matching contribution.

Even if you don’t get a match, there are still other reasons why opting for a 401(k) is a good idea—especially for beginner investors—like the fact that for tax year 2022, you can contribute up to $20,500 ($27,000 if you’re over 50) and that traditional 401(k) contributions help reduce your taxable income, which can reduce your tax bill down the line.

If you still have funds to invest after maxing out your 401(k), you can then level up your investing strategy by contributing to an individual retirement plan (IRA) too. The part that usually stumps people at this point is which type of IRA to go for: traditional or Roth?

How Tax Brackets Come Into Play

The key question to answer before you choose is whether you think your tax bracket will be higher in retirement than it is now.

If you expect to be in a higher tax bracket in the future, a Roth IRA might make more sense for you now because you’ll be able to contribute funds that are taxed at your current tax rate. And, since you’ve paid your taxes up front, you won’t have to pay any taxes to withdraw the funds in retirement so long as you wait until after you reach the age of 59 and a half.

Plus, if you need to access the funds at any time before then, you can withdraw up to the amount you originally contributed. For example, if you have a Roth IRA valued at $15,000, and $12,000 of the funds are your contributions while $3,000 of the funds are from investment gains, you could withdraw up to $12,000 without incurring any penalties.

Just keep in mind that not everyone is eligible for a Roth. If you’re single and have an adjusted gross income over $144,000 or married and earn more than $214,000, you’re out of luck (although there’s a loophole called the backdoor Roth).

If you’re in a pretty high tax bracket already, a traditional IRA might be the better option. These contributions are tax-deductible, so they can potentially help you reduce your tax bill and qualify for tax credits.

With either IRA option though, there’s an annual contribution limit: For 2022, both are capped at just $6,000 (or $7,000 if you’re over 50).

Millie content is licensed from Meredith Operations Corporation, publisher of Millie, Real Simple, InStyle and more.

Mandi Woodruff-Santos is a career and finance expert and co-host of the “Brown Ambition” podcast with Tiffany “The Budgetnista” Aliche.


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