IRS Rules

• In order to contribute to both a 401(k) and a traditional IRA, you have to meet certain rules set forth by the Internal Revenue Service. If you are single, you can contribute to an IRA regardless of what your income is. If you are married, your eligibility depends on whether both spouses are covered by a retirement plan at work. If one is not and your joint income is less than $167,000, you could contribute to both accounts, as of 2010.
  
  

Matching Contributions

• With the 401(k) account, you can often receive matching contributions from your employer. When you contribute to a 401(k) out of your income, your employer can match the amount up to a certain percent. The employer gets a tax discount on the amount of money that they contribute to employee retirement account. With matching contributions, it usually works your advantage to max out your 401(k) contribution before contributing to an IRA.
  
  

Maximum Contributions

• With a 401(k) and an IRA, you have annual contribution limits that you must adhere to. With the 401(k), as the 2010, you can put in as much as $16,500 per year. You can put in $22,000 per year once you hit 50. If you qualify for an IRA also, you can put in a further $5,000 to this account. If you are 50, you can put in as much as $6,000.
  
  

Investment Options

• One of the differences that you may notice between these two types of retirement accounts is the number of investment options that are available. With a 401(k) account, you can generally invest in a few different mutual funds and possibly some stocks and bonds. With the IRA, you can usually contribute to many more types of investments. If you like investment flexibility, you may want to max out your IRA contribution after meeting the employer matching maximum contribution.
  
  

Potential

• By contributing to both of these accounts, you can significantly increase the odds of living comfortably during your retirement years. By only contributing to one account, you lower the amount of money that you are able to set aside on a pre-tax basis. With the uncertainty of investment returns, being able to put away more money gives you a better chance of being comfortable when you stop working.