Why You Should Open an IRA Even if You Have a 401(k)

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There are some good reasons why a 401(k) shouldn’t necessarily be your only retirement account.

If you’re lucky enough to have a workplace 401(k), it can be a great way to invest for retirement. You can divert money to your 401(k) before you get paychecks, making it easier to ensure you’re saving enough. You can get tax breaks for contributions since you save with pre-tax dollars, and you can sometimes get free funds from your employer if they match a portion of your contributions.

But, while you definitely want to invest enough into your 401(k) to get the full amount of matching funds from your company, you may not want to use the 401(k) as your only retirement savings account. In fact, even if you have a 401(k), it may still be worth finding an online brokerage firm and opening an IRA. Here’s why.

IRAs provide some significant advantages over 401(k)s that you may want to take advantage of

There are a few big reasons why it may be worth opening an IRA with a brokerage firm of your choosing even if you have a 401(k) that your employer offers you. Here’s what they are.

  • You have more flexibility with where you invest your money: With an IRA, you can usually invest in just about anything. You can decide what assets you want to invest in and find a brokerage firm that offers access to them. This can include individual stocks, ETFs, mutual funds, and more. With 401(k) accounts, you can only invest in the assets that your employer’s 401(k) account manager makes available. You don’t have control over who administers the 401(k), how many investments they offer, or what kind of investments those are. So, you could be stuck with a limited array of funds that have high fees. An IRA gives you back control over what to do with your investing dollars.
  • It’s easier to make contributions when you get spare money. With a 401(k), you have to sign up to have contributions taken out of your paycheck. It can take a pay period or two before the money starts getting withdrawn from your paycheck and moved into your 401(k) account. And there may be long forms to fill out to change your contribution amount. With an IRA, you have the option to move money into your brokerage account when you want to and to get it invested relatively quickly. This makes it easier to invest random windfalls you get throughout the year, or to quickly put more money into the stock market if investing conditions are good.

Of course, 401(k)s may have a big advantage over IRAs if you are able to earn a company match for investing in them. This is free money your employer provides to you if you make contributions to your account. You don’t want to pass it up.

What’s the right approach for you?

For most people, the best approach is to put money into a 401(k) to earn the full employer match and then open an IRA to invest more for retirement. By doing this, you get the best feature a 401(k) offers — employer matching funds — and can also take advantage of the perks only an IRA can provide.

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