In this segment of the Motley Fool Answers podcast, Alison Southwick, Robert Brokamp, and special guest Ross Anderson from Motley Fool Wealth Management begin by answering the original question -- can you max out both a 401(k) and an IRA? -- but then dig deeper. Because while contributions to one don't change your limits on the other, it's possible they will change your strategy.
A full transcript follows the video.
This video was recorded on Nov. 7, 2017.
Alison Southwick: The first question comes from Loren. Loren writes, "If you're already meeting the max on your 401(k), can you [also] max out an IRA or Roth, [but one that] isn't through your company?"
Robert Brokamp: Yes, Loren, you can always max out an IRA regardless of how much you contribute to your 401(k). However, your 401(k) can affect the type of IRA you choose. Basically, there is the deductible traditional IRA, the nondeductible traditional IRA, and the Roth IRA.
Whether you can deduct contributions to a traditional depends on whether you're covered by a plan at work, or if you're married, or your spouse is. Even if you're not participating, it just depends on whether you're covered. If you're covered and you make over a certain amount of money (if you have a high or modified adjusted gross income), you can't deduct a contribution. Now, for the Roth, whether you have a 401(k) at work or not doesn't affect whether you can contribute to a Roth, but the Roth also has limits based on your modified adjusted gross income.
Now what if you are close to those limits? What's one way to lower your modified adjusted gross income? Contribute to your traditional 401(k). In that way, there is a bit of an interaction, so if you're close to that limit, put more in your traditional 401(k) and you might then be able to contribute either to the Roth or a deductible traditional IRA. But the answer to your question is you can always contribute to an IRA regardless of what's going on with your 401(k). It just depends on the type you can contribute to.
Ross Anderson: The one thing I would add for Loren is not to ignore just a regular taxable brokerage account. Sometimes I think we get so focused on trying to find these fun pathways into IRAs that you forget that you can just buy stocks and invest directly in a taxable account. That word "taxable" tends to scare people because it sounds like you're going to pay a lot of taxes but, really, you get to decide when you buy and sell things, so you get to decide when the taxes are being paid.
Brokamp: Right. If you buy a stock that doesn't pay a dividend and you hold on to it for 20 years...
Brokamp: ... you don't pay any taxes until you sell it, and then you pay it at capital gains rates, which, at least according to current law, are lower than ordinary income rates.
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