Can You Have Two Retirement Plans?

Lower your tax bill by maximizing your retirement savings.

Saving for retirement can be a real challenge, and saving enough money can be a particularly difficult endeavor. The good news is, however, that there are many different retirement plans available. If you meet the qualification requirements, you can combine various retirement plans to maximize both your tax savings and your retirement nest egg.

Employer-Based Plans

If you have access to a workplace-based retirement plan like a 401k or 403b, you may still be able to contribute to a traditional or a Roth IRA. The IRS imposes income limits that can impact IRA eligibility, so it is important to review the criteria carefully before you invest. However, if you are a worker with a low to moderate income, you should be able to contribute to an IRA account even if you already have coverage through a workplace retirement plan. For 2011, eligibility for a traditional IRA begins to phase out for single taxpayers with an adjusted gross income above $56,000 and married couples above the $90,000 threshold.

IRA Accounts

If you are eligible to contribute to an IRA account, as of 2011, you can use that account to put aside an extra $5,000 in retirement savings. If you are at least 50 years of age, you can contribute even more. Older workers can contribute an extra $1,000 to a traditional or Roth IRA for a total 2011 contribution limit of $6,000.

Self-Employment Plans

If you have both wage income and income from self-employment or a side business, you can combine your workplace retirement plan with a SEP-IRA or other small business retirement plan. Contributing to a small business retirement plan can significantly reduce the taxes you must pay on your self-employment income, while participating in your workplace plan can reduce the taxes on your regular wages. The money you contribute to your small business retirement plan is deducted from your taxable income, which in turn lowers your overall tax bill.

Maximizing Your Contributions

If you can maximize your contributions to all of the retirement plans you have at your disposal, you can lower your tax bill significantly while building for the future. However, if you cannot afford to contribute the maximum amount for all those plans, you will need to develop a strategy that makes the most of them. You can, for instance, put enough into your 401k or 403b plan to get the company match, then focus on contributing as much as you can to your IRA or small business retirement plan. If you have money leftover, you can use it to increase the amount you put into your workplace retirement plan.

References

• The Motley Fool; Which Comes First: IRA or 401(k)?; Selena Maranjian; January 17, 2007
• CNN Money.com; Which Has Priority? My 401k or Roth IRA?; Walter Upderave; January 2007