November 21, 2022
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).
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).
If this is you, huge congrats on maxing out your yearly 401(k) contributions! The maximum you can contribute to a 401(k) is $22,500 for 2023 ($20,500 for 2022). If you're 50 or older, you can make catch-up contributions, up to an additional $7,500 ($6,500 in 2022), so that’s a nice chunk of money to sock away.
If you want to set aside more money for your retirement, setting up an IRA in addition to your 401(k) could make a lot of sense.
The total contributions you can put into all of your traditional and Roth IRA accounts for 2023 is $6,500 (or $7,500 if your're aged 50 or older). For 2022, the maximum contribution limit is $6,000 (or $7,000 if you're age 50 or older).
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.
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.
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.
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.
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.
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 allow 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. For details on eligibility rules, visit the IRS website.
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.
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