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

March 15, 2018 · 4 minute read

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

Dear SoFi planner,

I keep hearing that I need an IRA, but I’m not sure if that applies to me. I have a 401(k) with my company and am contributing about $10,000 per year, which my employer matches at 50%.

If I’m already saving a good amount for retirement, do I need an IRA too? I’m expecting a raise in 2018 and am wondering if I should I use that money to contribute more to my 401(k) or to open an IRA. For the record, I’m 28, so retirement is still a long, long ways off.


Retirement Saver

Dear Retirement Saver,

Good job on saving for retirement and taking advantage of your employer match! That’s a great start, and given your age and the power of compounding, time is on your side.

The first step in retirement planning is figuring out how much you need to save each year to make financial independence a reality. SoFi provides a retirement calculator to help you assess whether or not you are on target.

You said you are putting $10,000 into your 401(k), which is good. However, you can save up to $18,500 per year into your 401(k) plan in 2018. 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, $18,500, and they match at 50%, that’s $27,750 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.

Here’s the deal: The maximum amount you can contribute to an IRA is $5,500 ($6,500 if you’re 50 or older) for 2017 and 2018. 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 2018, the deduction for taxpayers making contributions to a Traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan, like a 401(k), and have modified adjusted gross incomes (MAGI ) between $63,000 and $73,000.

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 $101,000 to $121,000. If you’re contribution is for tax year 2017, the limits are lower, but our IRA Calculator makes it easy to see what works for you.

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:

If you need to boost your retirement savings and want to pay less taxes today: Yes.

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. 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.

But I will say this: 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.

Set up a complimentary IRA consultation today.

SoFi Wealth, LLC does not render tax or legal advice. Individual circumstances are unique and we recommend that you consult with a qualified tax advisor for your specific needs.
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