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4 Reasons Why You Might Want an IRA in Addition to Your 401(k)

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What we’ll cover:

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If you have a 401(k) retirement plan offered through your employer, you’re probably well aware of the benefits of using it as a good source for retirement savings. Contributing to a 401(k) plan is usually a no-brainer: you can typically set up automatic contributions, the money is taken out of your paycheck before you even see it, and your contributions are taken out pre-tax.

If your employer matches some of your contributions, it can make even more sense to make 401(k) contributions. For example, a match of 50 cents on the dollar is like getting an immediate 50% return on that money (although employers typically have limitations on how much they match). As they say, not taking advantage of a match is essentially like leaving money on the table, and no one wants to do that! 

Remember that even if you already have a 401(k) plan through your employer, it can still be worth checking out other retirement vehicles, like an Individual Retirement Account (IRA) to potentially add to your 401(k). That’s right – generally, you can add an IRA in addition to an existing 401(k).

You can open an IRA as long as you receive taxable income and are under age 70 ½. 

It can be helpful to learn about all of the different types of retirement plans and find the one (or combination!) that works best for your goals. Let’s dive into why an IRA could be a good portfolio add, even if you already have a 401(k). 

1. You are maxing out your 401(k) and want to save more.

If this is you, huge congrats on maxing out your yearly 401(k) contributions! The maximum you can contribute to a 401(k) in 2020 is $19,500 for those under 50 and $26,000 if you will be 50 or older at year-end, so that’s a nice chunk of money to sock away. 

If you want to set aside more money for your second act, setting up an IRA in addition to your 401(k) could make a lot of sense. The maximum you can put into all your IRA accounts for 2020 is $6,000 if you are younger than 50 and $7,000 if you are 50 or over. It’s possible to contribute the maximum to your 401(k) and your Traditional or Roth IRA each year, contributing to your savings even more. If you’re under 50, that could mean contributing as much as $25,500 a year to your retirement accounts.

By the way, if you have your own business on the side in addition to your regular employment, you might want to check out a SEP IRA, a retirement account primarily used by small business owners and self-employed workers. You can learn more about SEP IRAs and the potential benefits here.

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Note: if you have a traditional IRA, your ability to deduct contributions to that account from your taxes will depend on your income and filing status. Check out the IRS website here for specifics or consult with a tax professional if you have questions.

2. You want a plan with lower fees 

Many 401(k) plans will charge fees for managing your money. You may not even realize you’re being charged fees, or what they are. In fact, a survey conducted by TD Ameritrade found that 37% of respondents were unaware there were any fees associated with a 401(k) plan and only 27% of those surveyed knew how much their fees were.

In general, you could expect to pay less in fees for an IRA than compared to a 401(k). 

To get a better sense of what you’re paying, check your 401(k) plan’s costs. Be sure to look at the plan’s administration fees, investment fees and individual service fees which you can find on your 401(k) statement or prospectus (for participant-directed individual account plans you should receive statements quarterly and for all other individual account plans you should receive statements on an annual basis). You can also contact your benefits or HR manager who may be able to assist. 

In general, you could expect to pay less in fees for an IRA than compared to a 401(k). And since you typically have more investment options with IRAs compared to 401(k)s you can shop around more and compare fees of different funds and choose the best options for you.

It can be a good idea to compare the plans you’re considering with your 401(k) to see how your fees and contributions will shake out. If you’re unsure – and this stuff can get complex – a financial advisor could offer some guidance about what contributions and accounts, make sense for your particular situation.

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3. You want more investment options

IRAs typically have a wider variety of investment options for you to choose from compared to 401(k) plans. More choices could help you further diversify your portfolio, and even help minimize potential losses thanks to a wider range of securities.

4. You’re looking for variety in how your withdrawals are taxed

Retirement accounts are taxed differently, and how they’re taxed could impact the income you get when you retire. 401(k)s and traditional IRAs require you to contribute pre-tax dollars now, yet your future withdrawals are taxed. If you’re eligible to contribute to a Roth IRA, your contributions will be taxed now, but your withdrawals in retirement will be tax-free. 

You can make a full contribution to a Roth IRA for 2020 if your modified adjusted gross income is below $124,000 if you are single or below $196,000 if you are married filing jointly. For additional details, visit the IRS website.

Adding an IRA to your portfolio could help you build a nest egg that’ll support your retirement dreams. 

All that said, when you are taking distributions in retirement, you might appreciate having both types of accounts to tap.

Saving for retirement is a long game and there’s no one-size-fits-all strategy: how you contribute and which accounts you use will depend on your retirement goals and financial situation. As we mentioned, a financial advisor can offer some pointers if you’re unsure. But if you already have a 401(k) and are looking for ways to maximize your savings even more, cut fees, or boost your investment options, adding an IRA to your portfolio could help you build a nest egg that’ll support your retirement dreams. 

This article is for informational purposes only and is not a substitute for individualized professional advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA is not providing any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.  Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.

Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Neither asset diversification or investment in a continuous or periodic investment plan guarantees a profit or protects against a loss.