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Can I Invest in a 401(k) and an IRA At The Same Time?

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It is always a good idea to save for your retirement, especially in these turbulent economic times.  The main options for saving for your retirement include a 401(k) account and an IRA account.  Many people have both types of accounts, but are unsure on whether they can donate to both accounts at the same time.

The fact is that you can donate to both accounts in the same calendar year, but only up to a certain limit.  These limits are sometimes increased after a calendar year, other times they are not.  It always is good to research either via the Internet or with your local tax accountant to determine how much you can contribute into each type of account so that you plan accordingly to invest as much money as you can that is allowable under the law.

Roth IRA or 401k You Can do BothFor 2012, you are allowed to save up to $17,000 in a 401(k) account.  This is an increase of $500 over the amount you were allowed to save in 2011. If you are over the age of 50, you can save an additional $5,500 (same as in 2011), making the grand total $22,500.  It is important to note that this ONLY applies if your employer allows you to save this much of your income.  These limits are for those who make considerable income.  If your 401(k) account only allows you to invest 10% of your earnings, and you make $100,000, you can only donate up to $10,000 in your 401(k).

Saving money in a 401(k) account can give you significant tax savings because that income is not taxed and does not count toward the limits on deductions and tax credits, like the deduction for student loan interest and for child tax credits.

For 2012, you are allowed to save up to $5,000 in your individual IRA accounts, $6,000 if you are over the age of 50.  It is important to note the use of the word “accounts.”  This is because you are only allowed to contribute $5,000 ($6,000 for 50+) amongst all of your IRA accounts.  This includes both the traditional IRA and the Roth IRA, which is an IRA that is still included as part of your income for tax purposes, but is not taxed when you cash it in, unlike a traditional IRA.  A Roth IRA can only be opened if your income falls within the specified limits, up to $125,000 in 2012.

Therefore, if you have one or more traditional IRAs, Roth IRAs, or a combination of both, the maximum amount you can contribute to all of them is $5,000 ($6,000 for people 50+).  You can also contribute the maximum amount to your 401(k), which is up to $17,000 in 2012 as mentioned above.   As a result, you can contribute up to $22,000 to your retirement accounts if you are under 50 years of age, and up to $28,500 (up to $22,500 total for 401(k) + $6,000 for IRA) if you are over 50 years of age.

Note that those amounts do not include any 401(k) employer contributions, which can be up to $33,000 or 100% of your salary, whichever amount is smaller.  However, most employers only contribute between 3-6% on average toward their employees’ 401(k) accounts.

Therefore, it is possible, and even advisable, to invest in both a 401(k) account and one or more IRA accounts.  There are certain limits you must adhere to in regards to each type of account.  With a 401(k) account, a maximum amount of $17,000 ($22,500 for those 50+) can be donated if your account allows it; otherwise, it’s a specified percentage of your income, such as 10%.  With IRA accounts, you can donate up to a combined $5,000 ($6,000 for those 50+).  By knowing how much you can donate to each type of account, you can plan accordingly to put as much money away as possible during your working career so that you can build your retirement fund and be able to enjoy life after your working career is over.

Source: novelinvestor.com, savingtoinvest.com, brighthub.com

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