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Saving for retirement can sometimes be confusing, today we are going to look at a common question I hear, can I contribute to an employer plan (TSP, 401k, 403B, etc.) and an IRA?

Short Answer

• The short answer is yes, you can contribute to both, and your contributions to one do not limit the contributions you can make to the other, as the IRS does not aggregate the contributions between Individual retirement plans (like an IRA) and employer plans (like a 401K)
• Each type of plan, employer and individual, has its own rules and contribution limits, and we will look at those in more detail below

Employer Established Qualified Plans

• For a plan to be qualified by the IRS, it must satisfy the requirements set forth by the IRS
• Once qualified, the plan receives tax-advantaged treatment for its participants
• Common qualified employer plans are:
  • 401ks
  • Thrift Savings Plan
  • 403bs
  • SEP-IRAs
  • SIMPLE IRAs
• Qualified plans can have both pre- and post-tax options
• Contribution limits to Qualified Employer Plans are governed by the Section 402 limit, which in 2019 is $19,000
• Employees over 50 years-old can contribute an additional $6,000, putting their limit at $25,000 for 2019
• This is a per-person limit, NOT a per-plan limit, let’s look at an example:
  • Jim is a 45-year old software engineer who participates in his company’s 401k plan
  • Jim is also a Navy Reserve Officer, and contributes to a Thrift Savings Plan from his military pay
  • Jim contributed $14,000 to his 401k plan in 2019, since the 402 limit is $19,000 and he is under 50 years-old, that means Jim can only contribute up to $5,000 to his Thrift Savings Plan
• Employer plans also allow for employer contributions and these employer contributions do not count against the 402 limit, again let’s look at this through an example
  • Jim, our 45-year-old software engineer gets a 100% match from his company toward his 401k (must be nice to work for Jim’s company!)
  • In 2019, Jim contributed $14,000 towards his 401k and in turn received a $14,000 matching contribution from his company
  • Jim is still able to contribute $5,000 towards his TSP, as his contributions only totaled $14,000, the employer contributions do not count towards the $19,000 limit
• Anyone eligible for their company’s employer qualified plan can contribute, regardless of how much income they earn, which as you will see, is not the case for IRAs

Individual Retirement Arrangements

• Individual Retirement Arrangements (IRAs) come in two flavors, pre-tax (traditional) and post-tax (Roth)
• Traditional IRA contributions are pre-tax, meaning the amount contributed can be deducted from the person’s income tax when they file taxes
  • The contributions to a traditional IRA grow tax-deferred, and income taxes are paid on the contribution and it’s earnings when the money is withdrawn
• Roth IRAs are post-tax, meaning the contributions can not be deducted from a person’s income when filing taxes
  • The contributions to a Roth IRA grow tax-free, and as long as withdrawals meet IRS guidelines, there are no income tax or penalties assessed when they are withdrawn
• A person can contribute to both types of IRAs and can contribute to multiple IRAs in the same year, there is no limit to how many IRAs a person can contribute to
• There is however, a limit on how much can be contributed, again this is a per-person limit, not a per-plan; in 2019, the contribution limit to an IRA is $6,000
  • An IRA owner over 50 can contribute an additional $1,000, making their limit $7,000
• In order to contribute to an IRA, a person must have earned income equal to or above the amount they are contributing
• Let’s look at an example:
  • Going back to Jim, our 45-year-old software engineer, who made $60,000 in 2019
  • After contributing $14,000 to his 401K and $5,000 to his TSP, he finds that he would like to save even more for retirement
  • Since he has earned income and is under 50, Jim can contribute up-to $6,000 to an IRA; Jim chooses to contribute to a traditional IRA, which means he can deduct the contribution from his income when filing taxes
  • If Jim wanted to contribute to a traditional and a Roth IRA, he can, but must remain under the $6,000 limit; for example, if he contributes $3,000 to a traditional, he can only contribute $3,000 to a Roth IRA
• Unlike 401k contributions, the deductibility of a contribution to a traditional IRA can be limited based on the income a person earns IF that person is also covered by an employer plan
• The chart below shows who is eligible to make and deduct a contribution to an IRA:

• While Roth IRAs are not deductible, they too have an income limit on who can contribute
• In 2019, those limits are:
  • For Single filers, the phaseout for contributions to a Roth IRA start at $122,000 and phases out at $137,000
  • For Married filing jointly taxpayers, the phaseout starts at $193,000 and phases out at $203,000

So, Now That I Know I Can Contribute To Both, Which Should I Contribute To?

• As with all personal finance questions, it’s personal!
• While the situation is going to be dependent on your circumstances, here are three things to think about to help you decide
  • Does your employer provide a matching contribution
  • What investing options are available to you in the employer plan
  • Do you earn too much income to be able to deduct an IRA contribution or to even make a Roth IRA contribution
• Don’t let concern over which plan to contribute to prevent you from contributing to any, if you aren’t sure, contact me today, we can walk you through your options and help determine which one is best for you

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