Use 401(k) and IRA or just 401(k)?[ Edited ]
My employer matches my 401K at 8%. I am obviously putting in at least 8% myself. Would it be wise to also open an IRA account with USAA and contribute to both of these for my retirement? Or should I put it all into one account and not split up my savings?
First, I have to say that I LOVE that you’re trying to decide the best way to save more than just what your employer matches – especially when they match 8%! That’s fantastic!
This decision is really all about how you’d like to set up and manage your retirement savings. Here are some points to consider that might help you decide:
- Number of accounts. If you add more to your 401(k) instead of using an IRA, you’ll have fewer accounts to manage. Granted, having 2 accounts is far from overkill but some people find it easier to keep things in one account.
- Investment choices. If you’re looking for more or different investment options, taking the IRA route should give you access to near limitless choices. With the 401(k) you typically just get what your plan offers.
- Investment expenses. Generally – though not always – the internal expenses of mutual funds inside a 401(k) are cheaper than those of funds you can purchase in the retail market for use inside an IRA. At the very least, you should check the costs of each.
- Accessibility. You should typically avoid tapping your retirement funds prior to retirement. However, in extreme situations where you may need to access your funds sooner, contributions made to a Roth IRA can be withdrawn at any time without taxes or penalties. This is not true for contributions made to 401(k)s.
On the flip side, 401(k)’s can be accessed without penalty at age 55 as long as you’re separated from service and the separation happened in or after the year you turned 55. IRAs withdrawals (other than Roth contributions) generally have to wait until age 59 ½ to avoid penalties.
- Ease. Saving into a 401(k) is about as easy as retirement savings can get since the money comes directly out of your paycheck before you ever see it and requires no additional effort on your part. With an IRA, you have to set up the account and take the extra step to make sure you keep funding it.
- Contribution limits. 401(k) plans have higher annual contribution limits than IRAs do. In 2014, the max that can be contributed to a 401(k) for someone under age 50 is $17,500 where the IRA limit is $5,500. For those 50 and older, the limit is $23,000 for 401(k)s and $6,500 for IRAs.
- Eligibility. Depending on your income and your tax filing status, your ability to contribute to and/or deduct IRA contributions may be limited or possibly not permitted by the IRS. Unless you’re a highly compensated employee for your company, 401(k)s tend not to have these restrictions.
While far from an exhaustive list of things to consider here, I think this should give you a good start. The best news is, there really is no right answer here except to make sure that you're saving and you seem to have that well under control!
Thanks so much for your question and keep up the great work!