Should I Have an IRA and a 401(k)?

Should I Have an IRA and a 401(k)?

Are you wondering how to start saving for retirement? If so, good for you! The long-term benefits of saving for retirement often outweigh the short-term advantages of keeping more spending money in your wallet.

Retirement savings accounts can help you live comfortably after you retire. They can also help you maintain a lifestyle similar to the one you had when you were receiving steady income. Without retirement savings, you may struggle to make ends meet when you’re no longer working or you might need to continue working past your desired retirement age.

So, what can you do now to help secure your financial future after retirement? Most workers opt for either an IRA or a 401(k).

Difference Between an IRA and a 401(k)

IRAs and 401(k)s both provide tax-free or tax-deferred retirement savings to workers, but they function in vastly different ways. Understanding the difference between the two could help you decide which you should choose as your primary form of retirement savings — or whether you should use both.

An IRA is an individual retirement savings account set up at a credit union or other financial institution. You add money to the account over time. After retirement, the funds can be withdrawn and used at your discretion.

On the other hand, a 401(k) is an employer-sponsored retirement savings plan. If your employer offers a 401(k) plan, your contributions are deducted from your paycheck each pay period before taxes are deducted. Some employers match employee contributions, but they aren’t required to do so.

Several subtle differences between the two often make one a better choice than the other for many workers. Here are some of the main differences between an IRA and a 401(k):

  • Investment options. You can invest your IRA into almost anything — including stocks, bonds, and real estate — but 401(k) plans may have more limited investment options.
  • Contribution limits. You can contribute far more to a 401(k) than you can contribute to an IRA. The IRS states that you can only add $6,000 — or $7,000 if you’re 50 or older — to an IRA in 2019, but you can contribute $19,000 — or $25,000 for those 50 and older — to a 401(k) plan.
  • Employer matching. Although some employers choose not to match their employees’ 401(k) contributions, many do — which means you receive free money just for investing in your retirement. Because an IRA is an individual savings account and not employer-sponsored, no one will match your contributions.

Should I Have Both a 401(k) and an IRA?

Because a 401(k) is employer-sponsored, only those whose employers offer a 401(k) plan are eligible to obtain one. But if you’re qualified for both, you might be wondering, “Can I open an IRA if I have a 401(k)?” The answer is yes — and for many people, it’s a viable option.

Since an IRA offers more flexibility and investment opportunities, many workers choose to contribute the maximum company match into their 401(k), and then contribute the maximum IRA allowance. With this option, they enjoy both employer matching and a chance to diversify investments.

If you choose to contribute to both an IRA and a 401(k), remember that both have early withdrawal penalties. Experts recommend that you budget carefully and not contribute more than you can safely put away per month.

Overall, having both a 401(k) and an IRA can be a great way to diversify your retirement options — you can never be too prepared for the future, after all. However, before you decide, it’s ideal to meet with a trusted financial advisor first. They can help you explore the best options for you based on your circumstances and retirement goals. PSECU has contracted with a third-party to provide financial planning services to our members as another valuable membership benefit. Learn more.

Explore Your Retirement Savings Options with PSECU

You may have several questions as you explore your retirement options, and we’re here to help you find answers. Learn more about saving for retirement using our resources, or check out our blog for more financial tips for every life stage.

Contact us today if you’d like to learn more about opening an IRA with PSECU. We’d be happy to talk to you about your options and help you open an account.

The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. PSECU does not endorse any third parties, including, but not limited to, referenced individuals, companies, organizations, products, blogs or websites. PSECU does not warrant any advice provided by third parties. PSECU does not guarantee the accuracy or completeness of the information provided by third parties. PSECU recommends that you seek the advice of a qualified financial, tax, legal or other professional if you have questions.