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Should You Open an IRA If You Already Have a 401k?

December 22, 2018 · 6 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Should You Open an IRA If You Already Have a 401k?

Sometimes the daily grind can overshadow long-term financial planning. But a great way to help prepare for your golden years relaxing and enjoying your hard-earned time off is to actively start saving for retirement.

If you’re already contributing to a 401k plan at work, you may be wondering if you should also contribute to an IRA. The short answer may well be “yes.” Contributing to multiple retirement accounts could help set you up for financial success in retirement.

This post will go beyond discussing if you can contribute to both, delving into whether it makes good sense for your financial wellbeing to do so. And if it does seem as though contributing to both dovetails with your current financial situation and long-term plans, what strategies should you take to get the most out of this dual contribution strategy?

The answer will largely depend upon two issues: Whether you have enough money to fully fund both, and how much 401k matching your employer offers.

Retirement Dreams

As you work your way through the nuts and bolts of retirement funding, it’s important to keep why you’re doing this at the forefront. Quality planning for retirement can help you to meet your lifestyle goals in your post-working years.

For some people, the idea of retiring early is attractive. If that’s true for you, factor that into your planning. Others plan to work into their 70s—but on their own terms, perhaps involving part-time hours, telecommuting, or consulting.

As you get started planning your retirement savings, it’s a good idea to determine the estimated age you can or would like to retire. There are plenty of resources available online, including SoFi’s retirement calculator to help you determine at what age you can retire.

Difference Between IRA and 401k Funds

Although both IRAs and 401ks are retirement savings accounts, there are some important differences. A 401k is an employer-sponsored retirement plan that allows both the employee and employer to contribute to the account. Often times, employers will offer matching contributions to 401k accounts up to a certain percentage point or dollar amount.

If your company offers a 401k option, it is worth taking advantage—after all, a matched contribution is essentially extra money for retirement at no cost to you. If you are self-employed, you can open a solo 401k , with similar guidelines to a traditional 401k.

IRAs are Individual Retirement Accounts that anyone can set up for themselves. There are two main types of IRAs: Traditional and Roth.

In a traditional IRA, the money you contribute is tax-exempt but you are taxed when you withdraw the money in retirement, at the income bracket you are in then. With a Roth IRA, you pay taxes up front at the income bracket you are in at the time of contribution. You are then able to withdraw the money without tax.

If you’re employer doesn’t offer a 410k plan, you may want to set up an IRA, either Traditional or Roth depending on your personal financial situation. Even if you are already contributing to a 401k, you may still want to open and fund an IRA.

Annual Contribution Limits: Traditional and Roth IRA vs. 401k

As step one, it’s important to know the maximum that you can invest in each. In October 2017, the IRS announced an increase in the 401k-contribution ceiling for the first time since 2015. The annual contribution limit was increased from $18,000 to $18,500. Catch-up contributions for employees over the age of 50 remained at an additional $6,000.

Contribution limits did not change in 2018 for traditional IRAs or Roth IRAs. They remain at $5,500 per person, with a catch-up contribution for people aged 50 and up staying at an additional $1,000.

Reframing Traditional/Roth IRA vs. 401(k)

Instead of investing in only an IRA or your company’s retirement plan, consider how you can blend the two into a powerful investment strategy. One reason this makes sense is that you can invest more into your retirement, with growth providing even more resources to fund your retirement dreams.

Since employers often match 401k contributions up to a certain percentage, this regularly boosts the principal of your fund and adds more fuel to the growth of your retirement fund. Every company is different, so check with your employer to determine their policy on matching 401k contributions.

One of the best things about an IRA is the flexibility you have when investing. With a 401k, you have limited options when it comes to investment funds. With an IRA, you’re able to decide what you’d like to invest in, whether it be stocks of choice, bonds, mutual funds, or another option. By investing in both a 401k and IRA, you are taking advantage of employer-matched contributions and diversifying your retirement portfolio.

Max-Funding Both Retirement Plans

Are you able to fund both plans to the maximum? If so, this can go a long way in funding your dreams for retirement. If you are planning to contribute the maximum to both a traditional IRA and a 401k, you’ll need to do some research into how that affects the tax deductions on your 401k.

When You Can’t Max Out Both

Not everybody is able to max out both retirement fund options, but even if you can’t, you can still create a powerful one-two punch by making strategic choices. So, first, think about your company-matching benefit for your 401k. This is a key benefit (especially since these matching funds don’t count toward what you can personally contribute), and it makes sense to take as much advantage as you can.

So, let’s say that your company will match a certain percentage (say, 3%) of the first 6% of your gross earnings. Calculate what 6% is and consider contributing that much to your 401k and opening an IRA with what else you can invest this year.

And, if you end up having even more money to invest? Go back to your 401k because all you’ve done, with this strategy, is to contribute what could be matched. There is still plenty of value in contributing to your 401k beyond the amount that can be matched.

Now, let’s say you have a 401k plan but your employer doesn’t offer a matching benefit. Then, consider contributing to an IRA first. You’ll benefit from the ability to have a huge amount of investment choices, putting you in the driver’s seat. Once you’ve maxed out what you can contribute to your IRA, then contribute to your 401k.

No One-Size-Fits-All

The guidelines we’ve provided should help you to start creating your own unique retirement plan. But the reality is a retirement plan that might work for one person may not be right for the next. You need a personalized plan with just the right diversified portfolio. Items that you should consider when refining your retirement plan include:

•  Your current income

•  Anticipated future earning potential

•  Your current expenses

•  Anticipated future expenses (perhaps college for your children)

•  Your risk tolerance

•  How many opportunities you’ve missed and how you can catch up

To take this information and craft it into a strategic plan, consider consulting a financial advisor.

Maximize Your Retirement Funding with SoFi Invest®

With SoFi Invest, you can put your money to work. You’ll gain access to financial advisors who can help you with:

•   Goal planning: With a focus on your dreams for retirement, we’ll work with you to map out a plan and help you to stick to it.

•   Diversifying your portfolio: We invest in thousands of assets, so we can help to reduce and manage some risk.

•   Portfolio selection: To give you the best of both worlds, we actively manage your passive assets.

•   Automatic portfolio rebalancing: We do this whenever it’s needed!

Plus, SoFi doesn’t charge any management fees and we can help you take a look at your current 401k plans to see what you are getting charged. Then, we can help you rollover your 401k into an IRA with SoFi.

When you’re ready to take control of your retirement savings, SoFi will be here to help. See how a SoFi Invest account can help you reach your financial goals.


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This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
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