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 1. Individuals
 2. Build Your Knowledge
 3. Can you have a 401(k) and an IRA?




CAN YOU HAVE A 401(K) AND AN IRA?

Save as much as you can, for as long as you can: That’s what nearly every
financial professional encourages for retirement. So why don’t more people
contribute to a 401(k) and an individual retirement account (IRA) at the same
time? “Awareness,” says Jeremy Smalley, senior retirement education specialist
at Principal®. “Those two types of accounts can work together, and both have
advantages.”

If you didn’t know before, now you do: Generally, you can contribute to a 401(k)
if you have an IRA—and contribute to an IRA if you have a 401(k). Here’s why
it’s a savings strategy to consider.

 Tip: Brush up on how you can protect your retirement from market volatility.


CREATE A RETIREMENT SAVINGS ‘HOME BASE.’

Most people from every generation are likely to have multiple jobs with multiple
employers. Take people born from 1957 to 1965: They have held an average of 12
jobs—and that’s just one subgroup of baby boomers.1 That may mean multiple
retirement savings accounts over time that need to be managed and tracked.

Here’s why that matters: While a 401(k) is set up and typically funded in part
by an employer, a traditional IRA or Roth IRA is set up and funded entirely by
you. When you leave a job that has a 401(k), you must choose what to do with
those savings. If you are leaving one job for another one with a 401(k), you can
roll the funds over into that new savings. Or, you can roll those funds into
your own IRA—an option that works if you’re leaving the workforce or going to
another employer without its own retirement savings, too.

That’s one reason why some people prefer setting up and contributing to an IRA.
“It gives you a long-term account that, as you transition through employers over
time, you can use to consolidate your money,” says Stanley Poorman, a financial
professional at Principal.


SAVE THE MAX (OR JUST MAX OUT WHAT YOU’RE SAVING).

Let’s say you’re a super saver: You’re already getting your full employer 401(k)
match and contributing the maximum allowed by that plan (for 2022 it’s $20,500).
But you want to make even more progress. That’s one reason you might want to
contribute to an IRA. “Your true time horizon for saving for retirement is the
rest of your working life,” Smalley says. “Even if you can’t do it every year,
saving the max in both when you can helps.”

If you’re not able to max out that 401(k) contribution, contribute at least
enough to get the full match from your employer, Smalley says: “Don’t leave that
opportunity on the table.”


TAP INTO A WIDE RANGE OF INVESTMENT OPTIONS.

Every 401(k) or IRA is generally managed by an investment professional. They
choose a subgroup of investments based on the fund’s objectives.  Having both a
401(k) and an IRA may enable you to widen the investment offerings you are able
to save in, Poorman says, giving you both control and flexibility.  “It’s really
opening up your choices,” he says.


TRIM FEES AND TAXES.

Fees are relative, Poorman says; when it comes to investing in an IRA or 401(k),
look at what you get for the fees you pay.

However, your tax professional can give you more insight into whether
contributing to both a 401(k) and IRA may help your taxes. The short answer: It
depends on how much you’re contributing to each account and your income levels,
too.

There are contribution limitations for contributing to a Roth IRA and you can’t
deduct those contributions on your taxes. (That’s because you’re contributing to
those type of accounts with money you’ve already been taxed on.) The savings
come when you make qualified tax-free withdrawals from a Roth IRA or Roth
contributions in a 401(k).

 Tip: Get income and contribution limits for Roth and traditional IRAs for this
year.

If you have both a 401(k) and an IRA, there are also total contribution
limitations. Whether or not an IRA contribution is deductible in your current
tax year depends on how much you make and how much you contribute. In addition,
since both a 401(k) deferral and traditional IRAs are generally created with
pre-tax contributions (other contribution types may be available), you will pay
income tax on withdrawals during retirement.

 


NEXT STEPS

 * How much progress have you made toward your retirement goals? Log in to your
   Principal account to find out. First time logging in? Get started by creating
   an account.
 * Want to contribute to an individual retirement account on your own? We can
   help you set up an IRA.

--------------------------------------------------------------------------------


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1 Bureau of Labor Statistics

The subject matter in this communication is educational only and provided with
the understanding that Principal® is not rendering legal, accounting, investment
or tax advice. You should consult with appropriate counsel, financial
professionals, and other advisors on all matters pertaining to legal, tax,
investment or accounting obligations and requirements.

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