I participate in my company's 401(k) plan but I also want to invest in an Individual Retirement Account. can I do both?

Yes. But depending on your salary, your IRA contribution may not be tax-deductible.

Under current law, if you participate in a qualified employer-sponsored pension plan like a 401(k), you can only deduct a $2,000 annual IRA contribution if you are:

a) single and earning less than $25,000, or

b) married filing jointly and together earn less than $40,000

You qualify for a partial deduction on the IRA contribution if you are:

a) single and earn between $25,000 and $35,000, or

b) married filing jointly and together earn between $40,000 and $50,000

Of course, even if you make a non-deductible IRA contribution, its earnings won't be taxed until the money is withdrawn.

If I decide not to participate in the 401(k) plan, will I be eligible for a fully deductible IRA regardless of my salary?

Yes, provided neither you nor your spouse actively participates in a 401(k) plan or any other qualified pension plan.

You're automatically considered an active participant in a pension plan if you're eligible for a defined benefit plan - the traditional pension that's fully funded by the employer. But in a defined contribution plan like a 401(k), you're not considered an active participant unless you elect to contribute to the plan, or your employer contributes to it on your behalf.

If I have to choose between a 401(k) and an IRA, which choice makes more sense?

The 401(k) plan, almost always. This decision is truly a no-brainer if your IRA contributions aren't tax deductible and/or your employer provides a matching contribution to your 401(k) plan. A 401(k) with an employer match is a much better deal than an IRA that has no matching contribution and won't reduce your current income tax bill.

In fact, unless you're uncomfortable with the 401(k) plan's investment options, it's a better deal even if you don't have an employer match and your IRA contributions are fully tax-deductible. The reason: depending on your salary, a 401(k) plan may let you save up to $9,500 a year. Your maximum annual IRA contribution is limited to $2,000.

It's also easier to save in a 401(k) plan than in a IRA and for a very simple reason: your 401(k) contributions are taken out of your paycheck automatically. Savings in an IRA requires a continuing conscious decision and self-discipline that many of us don't have.

Another important potential advantage 401(k)s have over IRAs is that many 401(k) plans allow loans. You can't ever borrow money from your IRA account.

.