Supplement your 401(k) with an IRA

August 1, 2001
Stephen Allain

Pharmaceutical Representative

Having so many retirement choices shouldn't leave you wondering which type of retirement savings plan is best for you.

Investors saving for retirement have a lot of options these days. But having so many choices may leave you wondering which type of retirement savings plan is best for you.

For example, if you work for a company with a 401(k) retirement plan, should you still contribute to an individual retirement account?

Ideally, you would fund both plans to their maximum contribution amount. Unfortunately, there is no definite answer that applies to every investor. But there are some factors you should look at before deciding where to place your money.

Take advantage of matching contributions to your 401(k). If your employer matches your contributions, then it may be a good idea to invest in your 401(k), at least up to the amount matched by the company. But if your employer does not offer a matching contribution, you may want to consider investing that money in an IRA.

Ask yourself how much you can save. If you are able to save more than the $10,500 annual contribution limit to your 401(k), you should fund an IRA with the extra money. The maximum you can contribute annually to an IRA is $2,000 per person ($4,000 total if married).

Take a look at your tax situation. With a Roth IRA, your contributions aren't tax deductible, but your distributions at retirement are tax-free. With a 401(k) and a traditional IRA, your contributions are tax-deferred until you begin taking distributions. In addition, your 401(k) contributions reduce your taxable income.

Access to contributions. If you have a Roth IRA, you are allowed to take out your contributions penalty-free and tax-free at any time. With a traditional IRA, you are allowed to withdraw your contributions penalty-free after age 59 1/2, but you will still have to pay taxes on them. Premature withdrawal of the earnings from either a Roth or a traditional IRA can result in penalties, as well as taxes. With a 401(k), you may not access the money until age 59 or until you separate from service. If accessibility is a concern, an IRA may be a better option. However, if you are tempted to take the money out or want to make sure you don't touch it, you may consider keeping all of it in a 401(k).

Compounding power. You may want to take a look at the power of compounding when deciding to choose a 401(k), an IRA or a combination of the two. The more money you have in one account, the greater the potential for compounding.

Control over your investments. With a company-sponsored 401(k), you may be limited to the investments offered in the plan. With an IRA, you have the flexibility to choose from a wide range of investments.

Putting money away for retirement is smart, no matter what type of investment you choose. Your financial consultant can help you sort through the options and design a plan that will fit your financial objectives. Keep in mind that the earlier you begin saving, the better off you will be at retirement. PR

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