The short answer is yes! However, the type of IRA you can contribute to and the ability to receive a tax deduction is dependent on a number of factors.
In general, anyone who has access to an employer defined contribution plan, such as a 401(k) plan, even if they do not make any contributions to the plan, may be limited in terms of the type of IRA they can contribute to in a given year. To be clear, an individual with access to a 401(k) plan at work is permitted to also make IRA contributions in that year. However, the type of IRA and the deductibility of the IRA contributions are contingent on a number of elements.
- If available, you CAN contribute to a 401(k) and IRA in the same year
- Your annual income will dictate how much you can contribute
- There are restrictions on the destructibility of your contributions
What is an IRA?
Anyone with earned income can make a contribution to an IRA. For 2022, the maximum IRA contribution amount is $6,000 or $7,000 if you are age 50 or older. Earned income is generally defined as compensation for services, commissions, or other self-employment income. Passive income such as capital gains, interest, dividends, and rental real estate income is not considered earned income and, thus, not eligible for IRA contributions.
The advantage of saving through an IRA is the ability to generate tax deductions and benefit from the power of tax deferral (or tax-free growth in the case of a Roth IRA).
There are three types of IRA: (i) pretax Traditional IRA, (ii) after-tax Traditional IRA, and (iii) Roth IRA.
Pretax Traditional IRA
A pretax traditional IRA is the most common type of IRA. In general, you will receive an income tax deduction for the amount of the pretax IRA contribution and all distributions after-the age of 59 1/2 would be subject to income tax. However, any distribution taken prior to that age is subject to tax and a 10% early distribution penalty. Whereas, after the age of 72, the IRA holder is required to take a small percentage of their IRA as a required minimum distribution (RMD).
After-Tax Traditional IRA
An after-tax traditional IRA is a mix of a traditional IRA and a Roth IRA. Or said another way, an after-tax traditional IRA has the weakest characteristics of a pretax traditional IRA and a Roth IRA. In the case of an after-tax IRA, all contributions are made with after-tax funds and are, thus, not tax deductible. In addition, all earnings generated from the after-tax contributions are subject to income tax and early distribution penalties like a pretax traditional IRA and do not receive tax-free treatment like a Roth IRA.
Roth IRA
Unlike a pretax traditional IRA, a Roth IRA is an after-tax account. Roth IRA contributions are made with after-tax funds and are not eligible for any federal income tax deduction. However, so long as you have any Roth IRA that has been opened for at least five years, and the Roth IRA holder is over the age of 59 1/2, all Roth IRA distributions are tax-free. A Roth IRA can be funded in a multiple of ways. The same contribution limits apply as the traditional IRA.
Find out which type of IRA is best for you. Now that we know what an IRA is and have an understanding of the three types of IRAs, let’s dive into the rules involved in making IRA contributions for 401(k) plan eligible participants.
Related: Tax Free vs Tax Deferred: Which is Better?
Contributing to a Pretax IRA & 401(k) Plan in the Same Year
In general, if you have access to a 401(k) plan at work and want to make pretax IRA contributions in that year, the amount of income you earn will essentially govern your ability to make pretax IRA contributions.
| Single | Less than $66,000 | $68,000 to $78,000 | More than $78,000 | $6,000 + $1,000 more if you’re 50+ |
| Married, with your own 401(k) | Less than $105,000 | $109,000 to $129,000 | More than $214,000 | $6,000 each + $1,000 more if you’re 50+ |
| Married, spouse has a 401(k) | Less than $198,000 | $198,000 to $208,000 | More than $208,000 | $6,000 each + $1,000 more if you’re 50+ |
| Married with own 401(k), filing own return | $0 | $0 to $10,000 | More than $10,000 | $6,000 + $1,000 more if you’re 50+ |
In sum, if you earn more than $214,000 and are married and file jointly and have access to a 401(k) plan at work, you will not be able to make pretax IRA contributions. That number drops to $78,000 if you are single.
Even if you don’t qualify for a deductible contribution, you can still benefit from the tax-deferred investment growth in an IRA by making a nondeductible contribution. If you do that, you will need to file IRS Form 8606 with your tax return for the year
Contributing to a Roth IRA & 401(k) Plan in the Same Year
With Roth IRAs, which provide no upfront tax benefit, it doesn’t matter whether you have an employer plan. How much you can contribute, or whether you can contribute at all, is based on your tax-filing status and your income for the year.
This table shows the current income thresholds:
| Tax-filing status | Income for full contribution | Income for partial contribution | No contribution allowed | Contribution limit |
| Single | Less than $125,000 | $129,000 to $140,000 | More than $14,000 | $6,000 + $1,000 more if you’re 50+ |
| Married, filing jointly | Less than $198,000 | $204,000 to $214,000 | More than $21,000 | $6,000 each + $1,000 more if you’re 50+ |
In sum, Roth IRA contributions are limited to those who earn less than $21,000 and are single or $208,000 and are married and file jointly in 2022. Although, there is a workaround known as the backdoor Roth IRA.
Backdoor Roth
As of 2010, there is no longer any income level restrictions for making Roth IRA conversions, hence a high income earner can do a conversion of after-tax (non-deductible) IRA funds to a Roth IRA, which is known as a ‘backdoor’ Roth IRA. In other words, the ‘backdoor’ IRA allows a high- income earner who has exceeded the Roth IRA annual income contribution limits ($140,000 if single & $240,000 if married) from circumventing those rules and making the Roth IRA contribution.
Doing a Backdoor Roth IRA is simple. Just make a traditional IRA contribution and then have the custodian or financial institution convert the funds to Roth. The conversion can happen pretty much immediately after the after-tax contribution is made. Since the funds are after-tax and there have been no earnings on the after-tax funds, the conversion would not be taxable. However, there may be a limitation on the amount you can convert to Roth. Under Internal Revenue Code Section 408(d)(2), the aggregation rules hold that when an individual has multiple pretax IRAs, they will all be treated as one account when determining the tax consequences of any distributions (including a distribution out of the account for a Roth conversion). In other words, the aggregation rules can cause issues for individuals looking to take advantage of the ‘backdoor’ Roth IRA strategy that have multiple IRA accounts. Let me explain further. For example, if Jen had a pretax IRA of $5,000 from 2018 and wanted to do a backdoor Roth IRA of $5,000 for 2022, only 50% of the $5,000 would be able to be converted to Roth under the aggregation rules.
Conclusion
Many retirement investors are often surprised when they are told they are not permitted to make pretax IRA contributions along with their 401(k) contributions in the same year because of their income level. Unfortunately, the IRS is focused on limiting taxpayer deduction options. However, there are typically other options, such as the Roth IRA or backdoor Roth IRA. Roth IRA contributions are not tax deductible, but they do provide tax-free growth opportunities for retirement.
