Do I need an IRA if I have a 401(k)?

Contributing to both an employer-sponsored retirement plan, like a 401(k), and an individual retirement account (IRA) offers benefits: While 401(k)s allow you to save more each year and often include a match from your employer, IRAs give you the flexibility to choose the investment firm you wish to work with.

But what's the right choice for your retirement savings? While both account types help you save for retirement in a tax-advantaged manner, they differ in important ways. Understanding these differences can help you decide whether to contribute to a 401(k), an IRA or both.

The differences between a 401(k) and an IRA

401(k)s

A 401(k) plan is offered through your employer and allows you to contribute a percentage of your salary toward retirement. Employer plans may offer a traditional 401(k) and a Roth 401(k) for employees. Like an IRA, a traditional 401(k) is funded with pretax dollars and distributions are taxed as ordinary income, while a Roth 401(k) is funded with after-tax dollars with the potential for tax-free withdrawals in the future.

With a 401(k), your employer makes several decisions on your behalf — where your account is held, when you’re eligible to contribute, what investment options and services are available to you, and when you can take distributions from your account, to name a few.

401(k) plans can offer certain benefits that are unavailable to IRAs, such as: 

• Ease of use
  • Contributions can be automated through payroll deductions.
  • There are no income limits for Roth contributions or to deduct traditional contributions.
  • Tax benefits occur at the time of deposit for pretax accounts instead of when you file taxes.
  • You can typically take earlier penalty-free withdrawals, and you may be able to borrow from your plan.
  • You can generally delay required minimum distributions (RMDs) from your current employer's plan while employed.
• Investor protections
  • Your employer is a fiduciary and makes certain decisions on behalf of you and other plan participants. Those decisions must be in the plan's best interest.
  • Creditor and litigation protection is generally more favorable for employer plans.
• Fees and expenses
  • Employer plans generally have lower fees and expenses than an IRA.

IRAs

While a 401(k) can and should be a key part of your retirement savings (if available to you), even with a 401(k), an IRA can be beneficial.

An IRA is a tax-advantaged account designed specifically for retirement savings. Unlike a 401(k), an IRA isn’t tied to your employer — you can open an IRA at any time through a bank, brokerage company or another financial institution, and you can move your IRA to another provider at any time. Though there are some limitations, most working individuals and their spouses can contribute to an IRA.

The two most common types of IRAs are traditional IRAs and Roth IRAs, and the difference between them is mostly how and when your money is taxed. A traditional IRA is generally funded with pretax dollars and distributions are taxed as ordinary income, while a Roth IRA is funded with after-tax dollars with the potential for tax-free withdrawals in the future.

Compared to a 401(k), IRAs offer the following benefits:

• Flexibility
  • You decide your investments, services and service providers.
  • You can access IRA assets at any time, although they may be subject to taxes and penalties.
  • Roth IRA contributions can be taken any time without taxes or penalty.
• Investment choice
  • IRAs typically offer a wider investment selection.
• Access to individual advice
  • With an IRA, you can have access to personalized and holistic financial advice, which you may not be able to get from your 401(k) plan.

How a 401(k) and an IRA can work together

401(k)s and IRAs are both valuable retirement savings tools on their own, but when used together, they can offer greater savings potential and access to a wider range of features and benefits that can further progress toward your retirement savings goals. Therefore, contributing to both can be a beneficial strategy for many investors.

If your employer offers a company match, we recommend saving in your employer plan first, up to the match, if it fits your situation. Where you contribute your next dollar depends on your preferences. Most people continue contributing to their employer plan because it's easy, it has higher contribution limits and results in fewer accounts if it's your main investment account. However, you may want to consider contributing your next dollar to an IRA if:

• You want to make Roth contributions and your plan doesn't provide a Roth option;
• You desire a specific IRA benefit described above and you're willing to pay higher fees and expenses for it;
• Your employer plan's fees and expenses are relatively high; OR
• You're already contributing up to the annual limit for your 401(k) and want to save even more for retirement.

You may also be able to move existing 401(k) assets to an IRA through a 401(k) rollover if desired.

How we can help you save for retirement

With so many different ways to save for retirement, it can be difficult to figure out which ones make the most sense for you. Your Edward Jones financial advisor can help you understand your options and design a retirement savings strategy to fit your needs.