When you begin to save for retirement, you are generally confronted with two options – an employer sponsored retirement plan or an individually owned plan. It’s a common misconception that you must choose between these two options.
The truth is that a savvy savings strategy can include contributions to both a 401(k) and an IRA in the same year. With this strategy, you can take advantage of the strengths of each account to solidify your retirement plan.
Benefits Of Combining 401(k) and IRA Contribution Strategies
A 401(k) offers a powerful way to grow your retirement savings quickly through matching contributions from your employer. This “free money” is a huge incentive to contribute to your employer’s plan. However, 401(k)s also come with some limitations. First, your investment choices are generally limited to a predetermined list of mutual funds. Second, it’s cumbersome and costly to access your money prior to reaching retirement age.
An IRA, on the other hand, does not provide the opportunity for your employer to match contributions. These accounts generally provide more flexibility than 401(k)s including a vast array of investment options, and you can take withdrawals at any time, but penalties usually apply for early withdrawals except in special circumstances.
By strategically using both a 401(k) and an IRA, you can harness the power of employer matching while also gaining the investment flexibility and easy withdrawals of an IRA. This dual-pronged approach can help you accelerate your savings and build a more robust nest egg.
Who can combine 401(k) and IRA saving strategies?
To contribute to both a 401(k) and IRA, you must work for an employer that offers a 401(k) plan. Additionally, your budget must allow you to comfortably save a portion of your salary.
While you can contribute to both plans, your ability to receive the full benefit of an IRA also depends on your income. Traditional IRA contributions are only deductible if your income is below certain limits, and Roth IRAs only allow direct contributions for people with income below the applicable threshold.
If you are covered by a retirement plan at work, you can deduct your contributions to a Traditional IRA in 2025 if:
- you are single or head of household and your income is $79,000 or less.
- you are married filing jointly or a qualifying widow(er) and your income is $126,000 or less.
You can contribute directly to a Roth IRA in 2025 if:
- you are single and your income is $150,000 or less.
- you are married filing jointly or qualifying widow(er) and your income is $236,000 or less.
If your income is above these limits, you still have options. First, you can consider making a non-deductible contribution to a Traditional IRA. These contributions don’t qualify for tax deductions, but the funds grow tax deferred. Second, you can consider a backdoor Roth IRA contribution. This involves making a non-deductible Traditional IRA contribution and then converting that amount to a Roth IRA. Backdoor Roth contributions are most effective when you do not have other Traditional IRA assets.
How do you combine 401(k) and IRA contributions?
The most common way to combine contributions to a 401(k) and IRA is to approach your total contribution systematically. The following three-step process is designed to maximize savings potential while taking advantage of the available benefits of each type of account.
Step 1: Secure Your Full Employer Match
Your employer’s matching contribution is essentially “free money,” so you should always add enough to your 401(k) to receive the full match, if you can. This amount is generally a percentage of your salary, and it can vary based on your employer’s rules.
Step 2: Maximize Your IRA Contribution
After securing your employer match, contribute as much as possible to your IRA. The maximum contribution in 2025 is $7,000 – or $8,000 if you are age 50 or older.
Step 3: Save More in Your 401(k)
Once you have secured your employer match and maxed out your IRA, any additional contribution you can comfortably make should go into your 401(k). The contribution limit for these types of plans is much higher than IRAs – $23,500 for 2025 – which allows you to accelerate your savings.
How A Young Professional Can Combine 401(k) and IRA Accounts
Consider a single young professional with a salary of $75,000. Their employer offers to fully match 401(k) contributions up to 4% of salary, but this individual can comfortably save 15% of their salary, or $11,250.
Here is how an experienced investor would decide the optimal amount to save in each type of account:
- Get the 401(k) match. First, contribute 4% of salary to the employer sponsored 401(k) to get the full match. That’s $3,000 per year.
- Maximize IRA contribution. Next, contribute the maximum amount to either a Traditional or Roth IRA, as the salary is under the applicable contribution and deductibility limits. That’s $7,000 per year.
- Allocate the rest to 401(k). There is now $1,250 of planned savings remaining for the year – an additional 1.67% of salary. Add this percentage to 401(k) contributions. This results in a total of $4,250, or 5.67% in total salary contributions, to the 401(k).
- Set up automatic contributions. Configure the 401(k) to automatically deduct 5.67% of salary each month. Combine this with the $7,000 that will be added to the IRA in a lump sum or in monthly contributions of $583 to meet the 15% goal.
Combining 401(k) and IRA Accounts in a Two Income Household
For this example, consider a married couple where both individuals are employed. Spouse A earns $50,000 per year. Spouse B earns $250,000 per year and covers all the household expenses. This means Spouse A can comfortably save their entire salary. Like the previous example, employers match 100% of contributions up to 4% of salary. Spouse A also has an existing Roth IRA, but no Traditional IRA assets.
Here is how the example couple could determine an optimal split for their contributions:
- Get the 401(k) match. First, contribute 4% of Spouse A’s $50,000 salary to 401(k). That’s $2,000 per year, $166.67 per month.
- Make a backdoor Roth contribution. The couple’s combined income is above the limit, so direct contributions to a Roth IRA are not allowed. Instead, make a non-deductible, maximum annual contribution of $7,000 to a Traditional IRA and immediately convert it to a Roth IRA.
- Maximize 401(k) contributions. Contribute the remaining savings to 401(k). The maximum contribution is $23,500 and Spouse A has already committed to contribute $2,000. The remaining $21,500 represents 43% of their salary.
- Set up automatic contributions. Now, the plan is for Spouse A to contribute 47% of salary to 401(k) – 4% for matching and 43% additional – plus $7,000 to an IRA. They can set up automatic contributions to the 401(k) and choose monthly or lump-sum contributions to the IRA.
- Invest remaining savings. After Spouse A maximizes contributions to 401(k) and IRA accounts, consider saving up to $8,550 (2025) of the remaining salary in a Health Savings Account, if eligible. Then, whatever remains after taxes can be invested in a traditional investment account. Those funds can be available almost immediately if needed in an emergency.
These two examples illustrate the utility of combining 401(k) and IRA accounts. There are many more possibilities, so it is wise to discuss your personal situation with an experienced financial advisor.
Discuss Your Retirement Savings Strategy with Meld Financial
At Meld Financial, our experienced team of financial professionals can help you combine 401(k) and IRA accounts to achieve your retirement goals. We will help you determine the amount you can comfortably save, allocate your savings to each account, and choose appropriate investments to grow your funds.
Our retirement planning process centers around a comprehensive wealth management program that we call Financial Fingerprint®. We developed this program in-house through decades of helping clients achieve their retirement dreams, and we look forward helping you as well.
To learn more and get started, contact us today.
