Do I Need an IRA If I Have a 401(k)?

February 01, 2022 · 5 minute read

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Do I Need an IRA If I Have a 401(k)?

Many people wonder if they need an IRA if they already have a 401k? This article will address this question and dive into other strategies for saving for retirement.

Establishing Retirement Goals

The first step in retirement planning is figuring out how much you need to save each year to make financial independence a reality during retirement. The most important thing to remember is to start saving early, you’ll want to take advantage of the power of compounding, and if you start early then time is on your side.

Setting retirement goals doesn’t have to be a tough process. It is important as it can help steer you in the right direction for creating a plan of action. First calculate how many years you think you’ll be in retirement. Then consider that The U.S. Department of Labor estimates that people will need around 70%-90% of their pre-retirement income for each year of retirement.

From there you can get a rough estimate of the amount of money you’ll need for retirement. Periodically check in on your goal, SoFi provides an article to help you assess if you are on track for retirement or not.

Maxing Out Your 401k

One important strategy for retirement savings is to max out your retirement accounts each year and taking advantage of your employer match. For example, if you are currently putting $10,000 into your 401(k), that is great.

However, you can save up to $20,500 per year into your 401(k) plan in 2022. If your employer will match 50% of your contribution, you should probably focus your retirement savings into your 401(k).

You want to take advantage of as much matching as possible, since it’s “free” money. Plus, their contribution to your 401(k) doesn’t impact the amount that you can put into the account. If you contribute the maximum, $20,500, and they match at 50%, that’s additional money each year you’re saving for retirement. Not bad.

With that said, if you’re already maxing out your 401(k) or do not like the investment options available to you in the plan—which can happen, since they’re decided upon by your employer—an IRA is another great tax advantaged option for saving for retirement.

Recommended: Understanding the Differences Between an IRA and 401(k)

Utilizing an IRA

Here’s the deal: The maximum amount you can contribute to an IRA is $6,000 ($7,000 if you’re 50 or older) for 2022. But, you have to qualify to make a tax-deductible contribution based on your modified adjusted gross income (MAGI) if either you or your spouse are an active participant in an employer-sponsored plan.

In 2022, the deduction for taxpayers making contributions to a Traditional IRA is phased out for singles and heads of households who are covered by a workplace retirement plan, like a 401(k), and have modified adjusted gross incomes (MAGI ) between $68,000 and $78,000.

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $109,000 to $129,000. If your contribution is for tax year 2022, the limits are lower, but our IRA Calculator makes it easy to see what works for you.

Pros and Cons of IRAs

So, if you do qualify to make a tax deductible contribution to an IRA, should you do it?

It depends. Here are a few things to think about:

IRA accounts typically have no charges to open and give you the opportunity for low cost and well diversified investment options. While you cannot take out this money until you are 59 ½, there are exceptions. For example, first-time home buyers can take out up to $10,000 penalty free for the purchase of a first home.

You will need to pay taxes on that distribution if it is in a Traditional IRA; there are no taxes or penalties for first-time homebuyers if you put your money in a Roth IRA. (Here’s a rundown on the differences between the two.)

If you are not covered by an employer sponsored plan: Yes.

If you ever leave your job or find yourself without a 401(k), contributing to an IRA is a great option. Since you have no other tax advantaged retirement vehicle available to you, an IRA is probably the best way to save for what is likely the biggest financial goal you will ever have.

If you are on target for retirement through the savings in your 401(k): Maybe.

While saving for retirement is always a good idea, you may want to put any extra money that comes in towards another goal, like a house down payment or grad school. You can put your extra savings into a taxable brokerage account and invest it in a way that may help you reach those goals faster.

Recommended: What is a Brokerage Account?

You won’t get any tax benefit from saving in this account, but there are also no restrictions on when you can take the money out. Most Americans are behind on retirement savings, and the amount of annual savings into 401(k) plans is not enough to get on track.

IRAs provide a tax advantaged opportunity to improve your savings for this goal. I have yet to meet someone who was disappointed saving the most they could for retirement.

Where to Start?

SoFi Invest® offers IRAs (both Traditional and Roth) and our team of financial planners can work with you to create a personalized retirement plan, open an IRA, or rollover an old 401(k) into an IRA.

Open a retirement account with SoFi today.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


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