Why You Should Consider Having Both a 401(k) and an IRA
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What is the main topic discussed in this episode?
Here's your Money Briefing for Tuesday, June 6th. I'm J.R. Whelan for The Wall Street Journal. If you're putting money away for retirement, you probably have either a 401k or an IRA. But there's no rule that says you can't have both.
If you take the $22,500 that you contribute to the 401k and you add the $6,500 that you're contributing to an IRA, that's essentially almost 30% more per year.
We'll talk with Wall Street Journal contributor Michael Pollack about the pros and cons of having a 401k and an IRA after the break.
Millions of workers have 401 accounts to put money away for retirement. But is that enough? Wall Street Journal contributor Michael Pollack joins us with the pros and cons of opening up an IRA in addition to your 401 . So first of all, Michael, what's the difference between a 401 retirement account and an IRA? And how do they allow people to invest?
What is the difference between a 401(k) and an IRA?
So a 401 retirement account is an account offered through your employer. The employer usually deducts money from each paycheck, and that money is invested in an account on your behalf. The employer designs the account, determines what the investments are in the account, And it's a fairly smooth process. Most people don't even really pay a lot of attention to where the money is going in the 401k. And as a result of it being so easy, it's a great way for people to save up money for eventual retirement. An IRA or individual retirement account, on the other hand, is an account that is not held necessarily through an employer. Anyone can have an IRA. You can have one even if you're not working. And the IRA does not have a set menu of investments.
People have to decide on their own where the money in the IRA is going to be invested.
Why can you contribute to both a 401(k) and an IRA at the same time?
They have to choose the funds or the ETFs or whatever they want to put the IRA money into.
And there's no regulation that would prevent someone from having an IRA alongside their 401k?
That's right. There's no reason why you can't have both.
How much more can you save by using both a 401(k) and an IRA?
So what's the advantage of contributing to two retirement plans at the same time?
In the 401k plan, the IRS limits your annual employee contributions to $22,500 for people who are less than 50 years of age. There's also a limit on how much you can put into an IRA in a year, and that's $6,500. for someone who is under 50 years of age. But if you only contribute to the 401 plan, you're obviously putting away less money than you would if you contributed to both. If you take the $22,500 that you contribute to the 401 and you add the $6,500 that you're contributing to an IRA, that's essentially almost 30% more per year. And the other thing is the IRS from time to time increases those limits so over time you could be contributing more.
And are there disadvantages to having two retirement accounts going at the same time?
Well, it makes more work for someone who wants to keep an eye on both accounts. Because the choices are so broad in an IRA, someone really has to think a little bit about how they want to invest that money. There is a possibility also of racking up more fees or more trading costs if you have an IRA. So you have to think a little bit about how you're going to invest that money in a cost-efficient way.
So we're talking about IRAs and 401ks. We often hear a lot about Roth IRAs, and some companies are now allowing workers to open up Roth 401ks. How do those differ from traditional IRAs and 401ks, and why would someone consider those?
Well, so the biggest difference between the traditional IRA and the Roth IRA is is the type of money that you're contributing. With a traditional IRA, the money is on a pre-tax basis, which means that when you eventually start taking withdrawals from that IRA, that money is going to be taxed at your ordinary income rate. With a Roth IRA, you are contributing after-tax money. So that's money you've already paid tax on. And if you follow the IRS rules to the letter, by the time you retire, then that money can come out possibly tax-free. And the advantage of that is that if you have a large 401k plan and also a sizable IRA, if you're taking the required minimum distributions, which are what the monies are known as after you retire, starting to withdraw on those accounts, you could have a sizable tax liability and you don't really have a lot of control over how much income you're
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Chapters
6 chapters
1
What is the main topic discussed in this episode?
0:02–1:12
2
What is the difference between a 401(k) and an IRA?
1:12–2:14
3
Why can you contribute to both a 401(k) and an IRA at the same time?
2:14–2:28
4
How much more can you save by using both a 401(k) and an IRA?
2:28–5:14
5
What are the disadvantages or extra responsibilities of having both accounts?
5:14–6:06
6
How do Roth accounts differ from traditional 401(k)s and IRAs for tax planning?
6:06–6:55
Speakers
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