Here’s Why You Should Use a 401(k) and Traditional IRA

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Want to reduce your tax bill and save more for retirement? Consider opening a traditional IRA as well as your 401(k). Learn how. 

Want to boost your retirement savings in 2024? Good idea — most Americans don’t have enough saved for retirement. According to research from the Motley Fool, the typical American household has only $87,000 saved for retirement. And Federal Reserve data shows that, as of 2022, only 54.3% of Americans had any money saved in 401(k) plans or other retirement savings accounts.

The good news is: it’s not too late to increase your retirement savings and invest for the future. If you get a 401(k) plan at work, you still have options to save even more for retirement in a traditional IRA. Using a traditional IRA and a 401(k) can help you save more money on taxes while boosting your financial security for your retirement years.

Let’s look at a few reasons why you should consider using a traditional IRA in addition to your 401(k).

Yes, you can put money into both a 401(k) and traditional IRA

Don’t assume that just because you have a 401(k) at work, that means your 401(k) is your only option to save for retirement. Of course, you should definitely put enough money into your 401(k) to get the full employer match (if any) that your company offers. Don’t leave that “free” retirement money on the table.

But depending on your personal finances and income, you might want to open a traditional IRA too. Here are a few reasons to open an IRA, even if you already have a 401(k) at work:

You’re already maxing out your 401(k) and want to save even more money for retirement.You don’t get an employer match in your 401(k), or it takes a few years to be fully vested in the employer contributions in your 401(k).You don’t like the investment options and fees in your 401(k).You want another tax-advantaged retirement account that you fully control, that’s separate from your employer, where you can choose your own brokerage firm.You have a non-working spouse.Your spouse has a job, but doesn’t have a retirement plan.

All of these can be good reasons for putting extra retirement savings into a traditional IRA.

How to save money on taxes with a traditional IRA and 401(k) in 2024

The IRA contribution limits and deduction limits for 2024 have recently increased. According to the IRS website:

The maximum contribution limit for 401(k) plans is $23,000. People aged 50 and over can make catchup contributions of an extra $7,500, for a total of $30,500 in 2024.The maximum annual contribution limit for IRAs (traditional and Roth IRAs combined) is $7,000 for 2024. People aged 50 and over can make IRA catchup contributions of $1,000, for a total of $8,000 in 2024.

However, depending on your tax filing status, there are income limits on who is allowed to put money into a 401(k) and make tax-deductible contributions to a traditional IRA. Let’s look at the 2024 income limits for a few different types of taxpayers who are covered by 401(k)s or other retirement plans at work.

Single filers

If you are single, and covered by a retirement plan at work, and your modified adjusted gross income (AGI) is less than $77,000, you can get a tax deduction on the full amount of your traditional IRA contributions (up to $7,000, or $8,000 if you’re aged 50 or over).

If your modified AGI is between $77,000 and $87,000, you’re in the “phaseout range.” This means you can’t get the full tax deduction, but you can get a partial deduction that phases out to zero for higher incomes. And if your modified AGI is higher than $87,000, you cannot deduct any of the money that you put into your traditional IRA for 2024.

Married filing jointly

If you are married filing jointly, and you are the spouse who is covered by a workplace retirement plan, you can get the full tax deduction for traditional IRA contributions if your modified AGI is less than $123,000.

The IRA deduction phaseout range for a spouse who has a retirement plan at work goes from $123,000 to $143,000. And if your modified AGI is higher than $143,000, you cannot deduct any of your traditional IRA contributions.

If your income is in the phaseout range, you can still get a partial deduction for your traditional IRA contributions, but it’s complicated. You’ll need to do a calculation for this partial IRA deduction, based on your filing status and how much your modified AGI exceeds the lower limit of the phaseout range. Good news, the best tax software should be able to handle this calculation for you!

Even if your income is too high to get a tax deduction on your traditional IRA, you can still put money into the IRA up to the 2024 limits. It can still be worth saving more money for retirement, even if you don’t get a tax break. And nondeductible IRA money will still grow tax free, without having to pay capital gains taxes.

Bottom line: Depending on your income, tax filing status, and overall personal finances, you can put money into a 401(k) at work and contribute tax-deductible money to a traditional IRA. This can be a great tax-planning strategy for 2024, and can help you save aggressively for retirement. Make sure you understand the income limits and rules of modified AGI.

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