3 Reasons Why You Might Want an IRA in Addition to Your 401(k)Retirement Planning Jan 01 3 Min Read
If you have access to a 401(k) retirement plan and your employer matches some of your contributions, it may make sense for that account to be your primary retirement savings vehicle. A match of 50 cents on the dollar, for instance, can be thought of as getting an immediate 50% return on the money you contribute up to a maximum match set by your employer.
You may want to contribute to an Individual Retirement Account (IRA) in addition to your 401(k). Here are three potential reasons why:
1. Some 401(k) plans may be weighed down by high fees.
Retirement plans offered by large employers often have low expenses. But some workplace plans, particularly those offered by small businesses, may have higher expenses that can slow the growth of your nest egg. You should check your 401(k) plan’s costs, including plan administration fees, investment fees and individual service fees. You might be able to find similar or more attractive investment options in an IRA at a lower total cost.
After contributing enough to your 401(k) each year to get the full employer match, you might want to consider opening an IRA with lower costs to maximize your retirement savings. You could also consider making unmatched contributions to your 401(k).
2. You want more flexibility on the tax treatment of withdrawals in retirement.
Some employers offer only a pre-tax 401(k), which means you contribute pre-tax dollars now and your future withdrawals are taxed. If you’re eligible to contribute to a Roth IRA, you can contribute after-tax dollars today, and your withdrawals in retirement will be tax-free. When you are taking distributions in retirement, you might appreciate the flexibility of having both types of accounts to tap.
The maximum contribution to a Traditional or Roth IRA for 2020 and 2021 is $6,000 if you are younger than 50 and $7,000 if you are 50 or over. You can make a full contribution to a Roth IRA for 2021 if your modified adjusted gross income (“AGI”) is below $125,000 if you are single or below $198,000 if you are married filing jointly. For 2020 you can only make a full contribution to a Roth IRA 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 other tax situations and additional details, visit the IRS website.
3. You are maxing out your 401(k) and want to save more.
The maximum you can contribute to a 401(k) in 2020 and 2021 is $19,500 for those under 50 and $26,000 if you will be 50 or older at year-end. If you want to set aside additional dollars for retirement, you may be eligible for multiple IRA options with potential tax advantages.
We’ve already told you about Roth IRAs that offer tax-free withdrawals in retirement. With a Traditional IRA, your contributions may be tax-deductible today, and your money may grow tax-deferred until withdrawn in retirement. If you have a retirement plan at work, your income has to be below certain levels to be eligible to deduct contributions to a Traditional IRA. View the applicable IRS rules here.
If you’ve got a sideline business in addition to your regular employment, you might be eligible to put some of those self-employment earnings into a SEP IRA and potentially deduct the contribution from your income when calculating your taxes.
Individuals can easily open a Traditional, Roth or SEP IRA and get access to diversified investment portfolios of ETFs based on models designed by the Goldman Sachs’ Investment Strategy Group.
At Honest Dollar by Goldman SachsTM, individuals can easily open a Traditional, Roth or SEP IRA and get access to diversified investment portfolios of ETFs based on models designed by the Goldman Sachs’ Investment Strategy Group.
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