Everyone knows that saving for retirement is important. But not everyone knows how. This is due to the fact that there are many different ways to save for retirement – both by the employer and on your own. Can I open an IRA if I have a 401k?
Even if you participate in a 401 (k) work plan, you can still participate in an IRA Roth and / or traditional IRA as long as you meet the IRA qualification requirements. It may not be possible to deduct the tax on traditional IRA contributions if you also have 401 (k), but this will not affect the amount you can make – up to USD 6,000 or USD 7,000 with a top-up contribution for 2020.
It is usually sensible to pay enough money to your 401 (k) account to get the maximum contribution from your employer. But when you add an IRA to your retirement kit, you can get more investment options and maybe lower fees than your 401 (k) fees. The Roth IRA will also give you a source of tax-exempt income in retirement.
How to choose between IRA and 401 (k)
If you have 401 (k) at work, you may be trying to find out if it makes sense to open an IRA. First, understand the deposit limits for both accounts:
- In 2020, you can contribute up to USD 19,500 to the 401 (k) plan. If you’re 50 or older, the annual maximum jumps to USD 26,000.
- In 2020, you can donate up to $ 6,000 or $ 7,000 to the IRA if you’re 50 or older. You can contribute this amount to a traditional IRA or Roth IRA, or you can divide your money into any type of plan. (The IRA Contribution Limit is the total maximum annual limit: you can deposit a total of USD 6,000 for a traditional IRA Roth; you cannot deposit USD 6,000 for each account).
Here’s a good way to make a decision between 401 (k) and IRA, assuming you can’t maximize both:
- If your employer offers a 401 (k) match, make a sufficient contribution to get all this free money.
- After preparing to get a full match in 401 (k), then consider participating in an IRA. If you qualify for a tax deduction, a traditional IRA can offer many benefits beyond this tax relief, including access to cheap investments and low or zero administrative fees. Roth IRA is another great option.
- If you are unable to apply for the traditional IRA or Roth tax break, which is not right for you, then sticking to your 401 (k) may make sense.
Make your 401 (k) and IRA work together
All this aims to give you the greatest opportunity to save, with the greatest flexibility. So my idea would be to make a sufficient contribution to your 401 (k) to capture the maximum company fit. Then, if you are eligible – and especially if your 401 (k) has limited investment options – open a traditional or Roth IRA and bring an annual maximum. Then, if you can, put more money into your company plan until you use it. And if you get to the point where you can save even more (recognition!), Put this money into your taxable brokerage account