Can I Contribute to an IRA If I Have a 401(k) at Work?

This article was updated on January 8, 2018, and originally published on July 15, 2017.

Having a 401(k) or similar employer-sponsored retirement can certainly be a nice tool to grow your nest egg, especially if your employer provides a generous matching contribution. Having said that, saving for retirement in an IRA provides some unique benefits, and can be a nice supplement to your 401(k). Here's how to determine if you're eligible, and why you might want to use an IRA to complement your employer's plan.

A 401(k) could make you ineligible for a traditional IRA tax deduction

If you have a 401(k) or similar retirement plan at work, your eligibility to contribute to an IRA and potentially take a tax deduction depends on your income and which type of IRA you'd like to contribute to -- traditional or Roth.

Image source: Getty Images.

With a traditional IRA, there are specific income limitations for people who are eligible to participate in an employer's retirement plan. For 2018, these are:

Data source: IRS.

Here's what this means. If you participate in an employer's retirement plan, such as a 401(k), and your adjusted gross income (AGI) is equal to or less than the number in the first column for your tax filing status, you are able to make and deduct a traditional IRA contribution up to the 2018 maximum of $5,500, or $6,500 if you're 50 or older. If your AGI is between the numbers in both columns, you are eligible to deduct a partial traditional IRA contribution. And finally, if your AGI is at least as much as the phase-out limit in the last column, you are ineligible for the traditional IRA deduction in 2018.

Also note that the maximum traditional IRA contribution is the same for the 2017 tax year, and you can make 2017 IRA contributions until the April 17 tax deadline. However, the income limits have increased slightly, so be sure you qualify if you plan to contribute for 2017.

There are a few things to notice here. The first is the extremely low limit for married taxpayers filing separately. This basically means that if you're married and file separately, you're probably ineligible for a traditional IRA deduction if you have a retirement plan at work.

Also, keep in mind that these are the limits to take a traditional IRA deduction. If you choose, you can still make non-deductible contributions to a traditional IRA. This isn't nearly as beneficial as making deductible contributions, but it can still be more advantageous than simply investing in a taxable brokerage account.

Roth IRAs are limited by income, regardless of other retirement plans

Unlike a traditional IRA, Roth IRA contributions are not limited solely because you can participate in your employer's retirement plan. Instead, there is an income limit for Roth IRA contributions that applies to all savers.

For 2018, the limits to contribute directly to a Roth IRA are:

Data source: IRS.

Other than the limits for married taxpayers filing separately, the Roth IRA income limits are significantly more generous than the traditional IRA limits for employer-sponsored retirement plan participants.

It's also important to point out that these are the income limits to contribute directly to a Roth IRA. There is no income limit to convert a traditional IRA to a Roth IRA.

Reasons to contribute to an IRA in addition to a 401(k)

There are several key differences between IRAs and employer-sponsored retirement plans such as 401(k)s that can make it worthwhile to contribute to both.

For one thing, IRAs are much more flexible when it comes to your investment choices. With a 401(k), you are allowed to choose from a basket of investment funds. On the other hand, with an IRA, you can invest in virtually any stocks, bonds, or funds you want. If you want to invest some of your retirement savings in, say, Apple stock, an IRA can let you do that.

In addition, a Roth IRA can help you diversify your tax advantages, and can also provide several other benefits your 401(k) doesn't. As far as taxes are concerned, you won't get a deduction for your Roth IRA contributions, but all of your withdrawals in retirement can be tax-free, the exact opposite of most 401(k) investments. This can give you much more control over your taxable income in retirement. Roth IRAs also have no minimum distribution requirements, no maximum contribution age, and you are free to withdraw your original contributions whenever you want.

The bottom line is that IRAs can add flexibility and other benefits to your retirement strategy, so it can certainly be a good idea to use one to supplement your employer-sponsored retirement plan.