Can I also contribute to an IRA?
Yes. Your participation in a 401(k) plan has no impact on your ability to contribute to an IRA (Roth or traditional). You can contribute up to $5,500 to an IRA in 2012 ($6,500 if you're age 50 or older) if you qualify. But, depending on your salary level, your ability to make deductible contributions to a traditional IRA may be limited if you participate in a 401(k) plan.
In a Traditional IRA, you make contributions with money you may be able to deduct on your tax return and any earnings potentially grow tax-deferred until you withdraw them in retirement.
With the lure of tax-free distributions, Roth IRAís have become popular retirement savings vehicles since their introduction in 1998. There are other plans available that offer tax-free savings, however letís look at an example of Tax-Free vs Tax-Deferred below:
Example: Age 25 married, 2-children, home with mortgage and with those deductions you are in a 20% tax bracket. When you retire children have moved out, the home is paid off and your deductions are gone, now youíre in a 30-40% tax bracket. Why would you want to give the IRS more then you need to? Below are two examples using taxable and tax-free income during a retirement year. The following illustration is based on tax rates in place in 2011. Illustration assumes married filing jointly. Calculator: www.irs.gov
Tax-Free vs Tax-Deferred Retirement Savings: