You’re allowed to contribute to both an employer-sponsored retirement (like a 401k or solo 401k plan) and an IRA (both Roth and traditional) in the same tax year. However, there are some instances where your IRA contributions can get restricted or lose the ability to receive a tax deduction.
Are you eligible for a solo 401k plan? You can have a solo 401k plan, 401k plan, and an IRA at the same time, if eligible. Learn more in our free Solo 401k Handbook.
Traditional and Roth IRA contribution rules if you have a 401k or solo 401k
Anyone with earned income can contribute to a traditional or Roth IRA. In 2023, you can contribute up to $6,500 to an IRA if you’re under 50 years of age, and up to $7,500 if you’re 50 years of age or older.
However, a Roth IRA has income limits and a traditional IRA has tax deduction limits. If your modified adjusted gross income (MAGI) is too high, you cannot contribute to a Roth IRA. You can still make contributions to a traditional IRA regardless of your MAGI, but tax deductions could get reduced to zero.
Also read: IRA vs 401k: Main Differences
Roth IRA contributions while under an employer-sponsored plan
If your MAGI is too high, your contribution limit for a Roth IRA could get reduced to zero. Roth IRA income limits are adjusted each year. Here are the limits for 2023.
2023 Roth IRA income limits
- If your income is $138,000 or less, you can contribute up to the maximum Roth IRA contribution limit of $6,500 ($7,500 if age 50+).
- If your income is over $138,000 but less than $153,000, your contribution limit gets reduced.
- If your income is over $153,000, you cannot contribute at all.
For 2023, your income must be under $138,000 in order to contribute the maximum amount of $6,500 to a Roth IRA, or $7,500 if you’re over 50 years old. If your income is higher than $138,000 but less than $153,000, you can still make contributions, but your limit gets reduced. If you make over $153,000, you cannot contribute at all.
Note: If you’re over the Roth IRA income limit, you can workaround the restriction by doing a backdoor Roth IRA.
Also read: What is a Roth IRA
Traditional IRA contributions while under an employer-sponsored plan
2023 traditional IRA tax deduction limits
- If your MAGI is $73,000 or less, you get a tax deduction up to the maximum traditional IRA contribution limit of $6,500 ($7,500 if age 50+).
- If your MAGI is over $73,000 but less than $83,000, you’ll get a partial tax deduction.
- If your MAGI is over $83,000, you get no tax deduction.
For 2023, your income must be under $73,000 in order to get the maximum tax deduction on your contribution of $6,500 to a traditional IRA, or $7,500 if you’re 50 years of age or older. If your income is higher than $73,000 but less than $83,000, your tax deduction gets reduced. If you make over $83,000, you get no tax deductions for your contribution that year.
What is modified adjusted gross income and how do I calculate it?
Modified Adjusted Gross Income (MAGI) is used to determine your eligibility for certain tax deductions, credits, and other benefits. It’s calculated by taking your Adjusted Gross Income (AGI) and making specific modifications to it.
AGI is your total income from all sources, such as wages, self-employment income, rental income, interest, dividends, and other taxable sources, minus certain deductions like contributions to retirement accounts (e.g., IRAs), student loan interest, and alimony payments.
The modifications made to AGI to calculate MAGI include adding back certain deductions such as:
- Foreign earned income and housing exclusions for US citizens living abroad.
- Student loan interest and tuition deductions.
- Deductions for IRA contributions.
- Passive income or losses from rental properties or businesses.
- Certain tax-free income like interest from municipal bonds.
- Excluded foreign income.
- Deductions for higher education expenses.
MAGI determines your eligibility for various tax benefits, subsidies, and credits, including:
- Roth IRA contributions.
- Deductions for traditional IRA contributions.
- Health Savings Account (HSA) contributions.
- Premium tax credits for health insurance purchased through the Health Insurance Marketplace (Obamacare subsidies).
- Eligibility for certain education-related tax benefits.
- Medicare Part B and Part D premium adjustments.
- Eligibility for the Earned Income Tax Credit (EITC) and the Child Tax Credit.
Calculating your MAGI
To calculate your MAGI, you can view IRS Publication 590-A Worksheet 1-1 for calculating MAGI for a traditional IRA and Worksheet 2-1 for a Roth IRA.
The exact rules and components of your MAGI can vary depending on which state you live in, and specific tax and regulations in effect at the time. Ideally, you should ask your accountant to accurately calculate your MAGI each year.
What’s the difference between a Roth IRA and traditional IRA?
A traditional IRA is funded with pre-tax income and gives you a tax deduction on your contributions. Withdrawals in retirement are taxed as regular income, and will depend on your tax bracket and tax rates at the time of withdrawal.
A Roth IRA is funded with after-tax income and gives you no tax deduction on your contributions. However, withdrawals in retirement are completely tax-free. A Roth IRA also has several unique withdrawal rules such as the absence of required minimum distributions (RMD), and the ability to withdraw your contributions at any age without any taxes or penalties.
Contribution limits are aggregated
As long as you’re eligible, you’re allowed to contribute to both a traditional and Roth IRA in the same tax year. However, contribution limits are aggregated between all IRAs that you own.
The IRA contribution limit for 2023 is $6,500 if you’re under 50 years of age, and $7,500 if you’re 50 years of age or older. Your contributions to all of your IRAs for the year must not exceed the contribution limit. For example, if you’re under 50 years of age and contribute $6,000 to a Roth IRA, you would only have $500 in room remaining to contribute to your traditional IRA.
Do IRA contributions count towards your 401k or solo 401k limits?
No, IRA contributions are separate from 401k and solo 401k contributions. Even if you max out your IRA this year, you still have the full contribution limit for a 401k and solo 401k.
In 2023, a 401k plan has a contribution limit of $22,500 if you’re under 50 years of age, and $30,000 if you’re 50 years of age or older. And a solo 401k plan has a contribution limit if $66,000 if you’re under 50 years of age, and $73,500 if you’re 50 years of age or older.
What’s the difference between a 401k plan and a solo 401k plan?
A regular 401k plan is typically offered by employers to their employees. It’s a workplace-based retirement plan that allows eligible employees to contribute a portion of their salary. You can only have a 401k plan if you work for an employer who offers one, and they’re not obligated to do so. The downside of a 401k plan is that your investment options are limited to just a handful of mutual funds pre-selected by your employer when they set up the plan.
A solo 401k plan can be opened by self-employed individuals and business owners with no employees (besides their spouse). Since you own your business, you can set up a plan for yourself and make contributions as both the employee and employer, which allows for higher contribution limits than a regular 401k plan. A solo 401k is one of the most versatile retirement plans since it comes with a Roth option, do a mega backdoor Roth conversion, and invest in virtually any asset class (including alternative assets).