Why Open an IRA Outside of Your 401(k)?

By Brendan Hughes0 Comments

Saving for retirement goes beyond taking advantage of an employer-provided 401(k) plan. One option for additional savings includes opening an IRA. There are many reasons to open an IRA, including:
  1. Additional savings. Employees are limited to how much money can be contributed to a 401(k) account (pre-tax). For example, in 2013, that limit is $17,500. Opening an IRA account allows an individual to invest additional money each year, which in theory will increase the amount of money available upon retirement. IRA account contribution limits for 2013 are $5,500 (post tax), or a catch up contribution of $6,500 for anyone over the age of 50.
  2. Diversification. If the 401(k) is heavily invested in small- and mid-cap funds, having a second retirement account like an IRA allows investors to better protect their investments by diversifying, and maybe investing in large, specialty or international funds.
  3. Rollover opportunities. Establishing an IRA account gives investors rollover opportunities in two ways.

    If they change companies, the company will give them the opportunity to rollover any existing pension or earned 401(k) funds into the IRA. When done properly, this rollover is tax-free.

    An IRA account can be rolled over into a Roth IRA account. There are stipulations that must be met before this can be done or investors may be interested in this for a tax-savings reason. When money is withdrawn from an IRA, the investor will, however, have to pay taxes on the amount withdrawn. This includes the initial investment into the account, as well as, any earnings that may have been made on the stock market. When money is withdrawn from a Roth IRA account, as long as qualifying conditions are met it is tax free. Investors will often pay a tax penalty to roll over money from an IRA into a Roth IRA, with the expectation that they will save money by not paying taxes on the additional earnings made in the Roth IRA.
Having multiple retirement accounts can provide investors with many opportunities to save. In addition to IRAs and 401(k)s, what types of retirement accounts do you like to invest in?