“Maximizing Retirement Savings: Combining IRA and 401(k)”

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IRA vs. 401(k): Understanding Your Retirement Options

IRAs and 401(k)s are two popular types of tax-advantaged retirement accounts. While a 401(k) is typically offered by employers, IRAs (Individual Retirement Accounts) can be opened independently through banks, credit unions, investment brokerages, and mutual fund providers. This flexibility allows you to fund an IRA on your own terms, up to federal contribution limits.

Combining an IRA with a 401(k) can enhance your retirement savings and provide valuable tax benefits. Leveraging both accounts allows you to maximize their unique advantages.

IRA vs. 401(k)

Although these retirement accounts function differently, both enable you to save for the future.

401(k)

A 401(k) is a tax-deferred retirement account provided by employers. Employees can opt in and make contributions through automatic payroll deductions. Employers may also match some or all of the contributions. Contributions are tax-deductible, reducing your taxable income today, but you will pay taxes on distributions taken during retirement.

IRA

There are several types of IRAs, with Traditional and Roth IRAs being the most common.

• Traditional IRA: Contributions may be tax-deductible, and the money grows tax-deferred. Taxes are paid upon withdrawal.
• Roth IRA: Funded with after-tax dollars, allowing tax-free withdrawals of contributions at any time. However, early withdrawal of investment earnings before age 59½ may incur taxes.

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

Yes, you can have both an IRA and a 401(k). Here are a few reasons to consider it:

Different Contribution Limits

In 2023, you can contribute up to $22,500 to a 401(k) and $6,500 across all your IRAs. Those aged 50 and older can make additional catch-up contributions. If you max out your 401(k), you can continue saving in an IRA.

Taxation of Withdrawals

401(k) withdrawals are taxable, potentially pushing you into a higher tax bracket. A Roth IRA offers a pool of tax-free money in retirement, helping to offset your tax burden.

Avoiding Early Withdrawal Penalties

Withdrawing from a 401(k) or Traditional IRA before age 59½ usually incurs a 10% penalty. However, Roth IRA contributions can be withdrawn early without penalty, providing liquidity in emergencies.

Required Minimum Distributions

Starting in 2023, you must take distributions from tax-deferred accounts at age 73, increasing to 75 in 2033. This applies to 401(k)s, Traditional IRAs, and inherited Roth IRAs, but not regular Roth IRAs.

Pros and Cons of 401(k)s

Pros

• Higher contribution limits allow for more savings.
• Tax-deductible contributions reduce taxable income.
• Tax-deferred growth until withdrawal.
• Potential employer match provides additional funds.

Cons

• Taxes on withdrawals can reduce retirement income.
• Early withdrawal penalties before age 59½.
• Required minimum distributions starting at age 73.

Pros and Cons of IRAs

Pros

• Additional savings for retirement.
• Unique tax benefits for both Traditional and Roth IRAs.
• Roth IRAs exempt from required minimum distributions and early withdrawal penalties on contributions.

Cons

• Lower contribution limits compared to 401(k)s.
• Contributions may not be tax-deductible if you have a 401(k).
• Early withdrawal penalties and required distributions for Traditional IRAs.

Is It Better to Have an IRA or 401(k)?

Both IRAs and 401(k)s offer tax-efficient ways to save for retirement, each with its own benefits and drawbacks. The right choice depends on your financial situation. Consider having both to maximize your savings. Here are some questions to help you decide:

• Does your employer offer a 401(k)? If so, consider opting in.
• Is there an employer match? Contribute enough to secure it.
• Do you have extra funds for an IRA? If so, consider contributing to benefit from compound interest.

The Bottom Line

If you have extra money for retirement, an IRA can complement your 401(k) savings. Both accounts offer attractive tax perks. Ensure you’re contributing enough to your 401(k) to get an employer match.

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