Can I Contribute To Both A 401k And An IRA?

I just had the question asked: "Can I Contribute To Both A 401k And An IRA?"
What a great question. This means you are trying to put some serious money away. I congratulate you for that.


The resounding answer is YES! The ultimate question, though, is can you deduct the entire contribution to the IRA. If you are single and your company offers a 401k or other type of retirement plan, you can still contribute $5,000 to an IRA or up to $6,000 if you are 50 or older. If your Modified Adjusted Gross Income, or MAGI (for most people this number is similar the the Adjusted Gross Income, which is the number on the bottom of the first page of your tax return) is less than $55,000 then you can deduct the entire $5,000 or $6,000 (50 or over) contribution amount. If you earn over $65,000 you can't deduct ANY of the contribution (although you can still contribute). The gray area is when your MAGI is between $55,000 and $65,000 for 2009. There is actually a formula that will help you determine how much of your contribution can be deducted when your income falls within this area. It is:

Example: If you're single the "Highest dollar limt of MAGI range" is $65,000subtract your MAGI from this, let's say it is $60,000. Next, the contribution limit is $5,000 (under 50). The last part of the equation is "Highest dollar limit of phase-out range" which is $65,000 minus the "Lowest dollar limit of phase-out range" which equals $10,000.

This breaks down to: $5,000 x ($5,000 / $10,000) which equals $2,500.

This formula seems compicated when you look at it but it is quite simple. If we are half way between the beginning and end of the phase out range (MAGI is $60,000 when the bottom and upper limits are $55,000 and $65,000) then half of your contributiion can be deducted. If you were a quarter of the way into the phase out then you could deduct a quarter of your contribution amount.

This all gets a little more complex when you are married. Variables are if you and both your spouse work or not, if each spouse has a retirment plan at work and such.

I continually stress to people who are maxing out their retirement contributions: "Make sure you are doing the best thing for future taxation". It may be better to put money into a Roth and your 401k instead of an IRA and 401k.

Til later,

John