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

December 14, 2023

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What we’ll cover:

Taking advantage of your company’s 401(k) plan – especially if there's matching – can be a good way to save for retirement
Having a 401(k) doesn’t mean you should ignore other retirement vehicles – adding an IRA to your retirement portfolio, could offer potential tax benefits
Saving for retirement means finding an investment combination that makes the most sense for your financial situation and savings goals

If you have a 401(k) plan offered through your employer, you’re probably well aware of the benefits of using it to save for retirement. Contributing to a 401(k) plan is usually a no-brainer: You can typically set up automatic contributions, and the money is taken out of your paycheck before you even see it. If your employer matches some of your contributions, it can make even more sense to make 401(k) contributions.

But even if you already have a 401(k) plan through your employer, you may still want to consider opening an Individual Retirement Account (IRA) to help boost your retirement savings.

Here are three reasons why you might want an IRA in addition to your 401(k) plan.

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

The maximum you can contribute to a 401(k) is $22,500 for 2023 ($23,000 for 2024). If you're 50 or older, you could make catch-up contributions, up to an additional $7,500 in 2023 and 2024.

If you've maxed out your annual 401(k) contributions but want to set aside more money for retirement, setting up an IRA may be a good idea.

The total contributions you can put into all of your traditional and Roth IRA accounts for 2023 is $6,500 (or $7,500 if you're aged 50 or older - see "catch-up contributions"). For 2024, the maximum contribution limit is $7,000 (or $8,000 if you're 50 or older).

Good to know: IRS contribution rules and limits are subject to change. Always visit the IRS website or consult a tax professional for the most up-to-date information.

2. You want a plan with lower fees and more investment options

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. 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.

Generally speaking, you could expect to pay less in fees for an IRA compared to a 401(k).

IRAs also 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. If you have questions about your IRA investment options or fees, don’t hesitate to get in touch with a financial advisor for help.

3. You’re thinking about potential taxes in retirement

Different types of retirement accounts are taxed differently, and how they’re taxed could impact your income when you retire. Traditional 401(k)s and IRAs allow you to contribute pre-tax dollars now, but your withdrawals in retirement are taxed.

If you’re eligible to contribute to a Roth IRA, your contributions are made with after-tax dollars, but your withdrawals in retirement will be tax-free as long as certain conditions are met. For details on eligibility rules, visit the IRS website.

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

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.

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.

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