Can I Contribute to Both a 401(k) and an IRA?

This highlights one of the best 'tax plays' out there for w-2 employees, because the short answer is yes, you can contribute to both a 401(k) and an Individual Retirement Account (IRA). However, there are some nuances to work through:

401(k) Contributions

• Eligibility: Any employee can contribute to a 401(k) if their employer offers a plan. Contributions are made pre-tax (for traditional 401(k)s) or after-tax (for Roth 401(k)s).

• Limits for 2025: You can contribute up to $23,500 to your 401(k) ($31,000 if you’re 50 or older due to catch-up contributions).

IRA Contributions

You can contribute $7,000 ($8,000 for 50 and over) to an Individual Retirement Account (IRA) even if you’re participating in a 401(k). IRAs come in two main types—traditional and Roth—and the rules for contributions depend on your income and tax situation.

Traditional IRA

• Eligibility: Anyone with earned income can contribute to a traditional IRA, regardless of income. However, if you or your spouse are covered by a workplace retirement plan (like a 401(k)), your ability to deduct traditional IRA contributions depends on your modified adjusted gross income (MAGI):

  • Single filers: Full deduction if MAGI is $79,000 or less; partial deduction up to $89,000.

  • Married filing jointly: Full deduction if MAGI is $126,000 or less; partial deduction up to $146,000.

• Non-Deductible Contributions: If your income exceeds these thresholds, you can still contribute to a traditional IRA, but your contributions will not be tax-deductible. These contributions are made with after-tax dollars, meaning you won’t get an upfront tax break. However, the funds will grow tax-deferred until withdrawal.

Roth IRA

• Eligibility: Roth IRA contributions are subject to income limits. For 2025, single filers can make full contributions if their MAGI is $150,000 or less, with a phase-out up to $165,000. For married couples filing jointly, the phase-out range is $236,000 to $246,000.

• Tax Advantages: Contributions to a Roth IRA are made with after-tax dollars, but qualified withdrawals in retirement are tax-free, providing significant long-term benefits.

What Is a Backdoor Roth IRA?

A Backdoor Roth IRA is a strategy that allows high-income earners to contribute to a Roth IRA, even if they exceed the income limits for direct contributions.

How It Works:

1. Contribute to a Traditional IRA:

   • Make a non-deductible contribution to a traditional IRA. There are no income limits for non-deductible contributions.

2. Convert to a Roth IRA:

   • Convert the funds from the traditional IRA to a Roth IRA. You’ll owe taxes on the conversion.

Key Considerations:

• Pro-Rata Rule: If you have other traditional IRAs with pre-tax contributions, the IRS requires you to calculate taxes on the conversion proportionally. This can complicate the process.

• No Income Limit: Unlike direct Roth IRA contributions, the backdoor Roth has no income limit because the IRS does not restrict conversions.

How Does a Backdoor Roth Fit in with My 401(k)?

The backdoor Roth strategy works independently of your 401(k), but there are some connections to consider:

1. Maximizing Tax-Advantaged Space:

   • If you’ve maxed out your 401(k) contributions, the backdoor Roth allows you to save additional after-tax dollars in a Roth account.

2. Avoiding the Pro-Rata Rule:

   • If your 401(k) plan allows rollovers of pre-tax IRA funds, you can transfer pre-tax amounts from your traditional IRA into your 401(k). This reduces the balance in your IRA, making the backdoor Roth conversion tax-efficient.

3. Roth 401(k) vs. Roth IRA:

   • Roth 401(k)s and Roth IRAs both offer tax-free growth and tax-free withdrawals, but Roth IRAs have added benefits, such as no required minimum distributions (RMDs) in retirement. The backdoor Roth strategy gives you access to these advantages if your income is too high for direct Roth IRA contributions.