Laura answers a listener's question about whether you can use multiple retirement accounts in the same year.
Laura answers a listener's question about whether you can use multiple retirement accounts in the same year.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from Bill, who says:
"I maxed out my traditional 401(k) by contributing $23,000 for 2024 and would like to invest more, but I'm unclear about the rules. I'll have a bigger-than-normal tax bill because I earned some extra income working a side hustle last year. Can I also max out an IRA (individual retirement account) for more tax deductions?"
Thanks for your question, Bill. Congratulations on maxing out your workplace retirement account, which is a huge milestone, and earning extra income! This post will review the rules for using multiple retirement accounts in the same year and maximizing potential tax breaks whether you have a little or a lot of income.
Thanks for downloading episode 897 of the Money Girl podcast! I'm Laura Adams, an award-winning author, money speaker, on-camera spokesperson, and founder of The Money Stack, a free Substack newsletter.
You can learn more and connect with me at LauraDAdams.com. That's also where you can email your money question and sign up for The Money Stack, which gives subscribers a terrific Money Success Toolkit. You can also record a brief question or comment on our voicemail line at 302-364-0308.
Benefits of using multiple retirement accounts
Investing through retirement accounts is an excellent tax shelter, which means it reduces your current or future tax liability. Growing your account balance and cutting taxes is a powerful combination for building wealth. It's the primary reason I recommend making tax-advantaged accounts your go-to for investing.
In addition, you can use multiple retirement accounts in the same year. However, how much you can contribute and the tax benefits you get depend on the accounts you're eligible for and choose to put money into.
For instance, for 2025, if you're like Bill with a workplace retirement plan, most allow contributions up to $23,500 or $31,000 if you're over 50. That's an increase of $500 from the 2024 limits. Those aged 60 to 63 can make higher "super catch-up" contributions.
Bill mentioned having self-employment income from his side hustle. That qualifies him for a small business retirement plan, like a solo 401(k) or a SEP-IRA, which allow contributions based on your net business income.
There's no limit to the number of employer-sponsored retirement accounts you can contribute to. However, you can't exceed annual limits across all of them.
For instance, since Bill maxed out his employee contributions to a workplace 401(k), he could contribute up to 25% of his self-employed compensation as his own employer to a solo 401(k), which allows contribution limits as high as $70,000.
Bill asked about using an IRA, an excellent retirement account option when you max out a 401(k). Everyone with qualifying earned income, no matter your age, can use a tax-deductible, traditional IRA. For 2025, you can contribute an amount equal to your qualifying income, up to $7,000 or $8,000 if you're over 50.
You can contribute $7,000 or $8,000 to an after-tax Roth IRA if you have income under an annual threshold. Next, I'll explain the differences between traditional and Roth accounts and the rules for using them with a workplace retirement plan.
RELATED: What to do if you contribute too much to an HSA, IRA, or 401(k)
Differences between traditional and Roth retirement accounts
Traditional retirement accounts, like a traditional 401(k) or IRA, allow pre-tax contributions, giving you a nice tax deduction in the year you make them. In other words, you skip paying income taxes on the money you invest and the earnings until you withdraw it in retirement.
However, if you tap a traditional account before age 59.5, you typically must pay a 10% penalty, plus income tax, on the untaxed portion. Therefore, you should only put money into a traditional retirement account that you won't need to spend until retirement.
Roth retirement accounts, like a Roth 401(k) or IRA, require after-tax contributions, which don't benefit you in the current year. However, the terrific upside of a Roth is that withdrawals of contributions and investment earnings are tax-free in retirement if you've owned the account for at least five years.
You may have significant account growth in a Roth, and it never gets taxed, which could add to massive savings. You can even withdraw original Roth contributions before retirement without owing taxes or a 10% early withdrawal penalty. That gives you flexibility not offered by traditional retirement plans.
So, the main difference between a traditional and a Roth account is how and when you pay taxes. Contributions to a traditional account cut your current tax bill, and a Roth eliminates taxes on future withdrawals.
Note that you can contribute to traditional and Roth accounts in the same year if your combined contributions don't exceed the annual limit. For instance, if you're under 50, you could put $3,000 in a traditional IRA and $4,000 in a Roth IRA for 2025.
READ ALSO: Is it better to have a traditional IRA or Roth IRA?
What are the traditional IRA deductibility limits?
While you can max out a 401(k) and a traditional IRA in the same year, limits can restrict how much your IRA contributions are tax-deductible. Let's review the rules that apply when you or a spouse participate in a retirement plan at work.
Your tax deduction for traditional IRA contributions may be reduced or eliminated, depending on your modified adjusted gross income (MAGI) as follows for 2025:
So, if Bill is single with an income less than $79,000, he could get a full tax deduction for any amount he contributes to a traditional IRA. But if he earns $89,000 or more, he won't get a tax deduction for traditional IRA contributions.
If Bill files taxes with a spouse, he's unable to claim a traditional IRA deduction if his household income is $146,000 or above.
So, if your income is below your tax filing status limit and you want an additional tax deduction for the year, contributing to a traditional workplace plan and a traditional IRA is a great option.
Here's another situation that affects married people. Let's say you're not covered by a retirement plan at work, but your spouse is. For 2025, married couples filing taxes jointly get a full deduction with household MAGI up to $236,000 and a partial deduction up to $246,000. You'd receive no deduction at or above $246,000.
RELATED: 4 ways to fund a Roth no matter your income
What are the Roth IRA income limits?
If your income is too high to qualify for deductible traditional IRA contributions when participating in a workplace retirement plan, consider using a Roth IRA instead. Since Roth contributions are nondeductible (paid on an after-tax basis), there's never a problem using a workplace retirement plan and a Roth IRA in the same year.
However, there's a catch because Roth IRAs have an annual income limit to qualify. Here are the Roth IRA income limits for 2025:
So, getting back to Bill's question about whether maxing out a traditional IRA will reduce his taxes, the answer depends on his income and tax filing status. If he earns too much to get a full traditional IRA tax deduction but is under the income limit for a Roth IRA, that's a terrific option.
While a Roth IRA doesn't give you an upfront tax benefit, it may provide you with something even better: tax-free income in retirement.
If Bill has enough business income to make it worthwhile, opening a traditional self-employed retirement account would allow him to make tax-deductible contributions and reduce his tax liability.
The younger you are, the more beneficial Roth contributions can be. And high earners typically get more advantages from traditional retirement accounts.
If you're unsure whether to choose a traditional or Roth account or how to use multiple retirement accounts in the same year, consult a certified tax professional.
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That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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