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Can you have a 401(k) and an IRA?

| June 14, 2016
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401(k) Plans

The answer to this question is, “Yes, you can.”  It is important to understand what exactly a 401(k) is and what exactly an IRA is to understand how the two can coexist.

What is a 401(k)?

A 401(k) is a tax-qualified retirement plan offered by an employer.  It is called a 401(k) plan because that is the subsection of the Internal Revenue Code it can be found under.  The idea behind a 401(k) plan is that the government will give you a tax incentive to save for your retirement by allowing you to defer income in what could be your highest earnings years as you work.  In 2016, you can contribute up to $18,000/year from your paycheck into a 401(k) plan, with an additional $6,000 if you are over age 50.  Depending on your company, your employer may also contribute to your 401(k) plan on your behalf, making contributions much more attractive.

What is an IRA?

An IRA is an Individual Retirement Account which exists independent of your 401(k) plan.  The maximum amount an individual can put into an IRA is $5,500, with a $1,000 catch up if you are over age 50.  Tax deductibility into a traditional IRA depends on a couple of factors including your income and whether your employer offers a qualified plan such as a 401(k).  IRAs are not limited in their investment selection to mutual funds or ETFs (Exchange Traded Funds) approved by a sponsoring company, unlike many 401(k) plans, which often have limited choices.

A synopsis of some of the key differences between a traditional IRA and 401(k) include:

401(k)

IRA

Max contribution (annual)

$18,000

$5,500

Tax deductible contributions

Yes

Depends

Investment choices

Often Limited

Nearly Unlimited

Possible employer contributions

Yes

No

Age 50+ catch up contribution

$6,000

$1,000

Penalty for non-qualified early withdrawal

Yes

Yes

Required distributions at age 70 1/2

Yes

Yes

Contribution deadline

Dec. 31

April 15th (for prior year)

It is worth mentioning that a derivative of the traditional IRA is a Roth IRA in which taxation works basically the opposite of a traditional IRA.  You contribute post-tax money and make withdrawals at a later date, free of any taxes.  For more information, feel free to read Comparison of Traditional and Roth IRAs.  Yet another variant is the Roth 401(k) plan which is a unique combination of features of the Roth IRA and the 401(k) company plan, however, the list of companies that offer this plan are limited.

HCM has the tools and knowledge to help you sort through any questions you may have around IRAs and your 401(k) plan including helping you establish an IRA plan. If you want to walk through this together, feel free to reach out to me at jim@hengeholdcapital.com.


Date Posted: 06/14/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us. Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence. If you would like to discuss your Wealth Accumulation or Retirement Income Plan with an HCM Wealth Advisor, please give us a call – 513-598-5120. Located in Cincinnati, Ohio, we serve clients in 23 states, and we’d love to help.

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