While you are saving in a company sponsored 401(k) or a personal individual retirement account(IRA), you might be wondering if it is enough. The question looms of whether it make sense to open an additional retirement account or simply continue contributing to the one you already have. This question has a few caveats to it that are worth understanding before making a decision.
401(k) versus IRA
If you are already working for a company that provides you with a 401(k) and matches part of your contribution, you might think it is overkill to add an additional IRA to your portfolio. You wouldn’t be entirely wrong since the maximum annual contribution to a 401(k) plan is $19,000 while the largest annual contribution you can make to an IRA is only $6,000($25,000 and $7,000 if you are 50 years or older). Saving more would be nice, but wouldn’t it make more sense to contribute the maximum amount first?
Maximizing your contributions makes a lot of sense especially if you are not already contributing enough to maximize your company’s match. Your first priority should be to take advantage of every dollar of free money you can get from the company by increasing your contribution. If you are already getting everything you can from the match, opening an additional IRA is worth considering.
With a 401(k) held within a company, your investment options are limited to what is offered in the company plan. By opening an IRA, your options are only limited by what you are willing and able to contribute at the time of the investment. You can also implement greater diversity in the way you are investing. Perhaps you are already taking an aggressive position with the money in your 401(k). If you would like to add a more conservative growth approach to your portfolio or diversify with more international stocks, it would at least be worth your time to explore options available outside of your company plan.
You might also consider opening a Roth IRA to diversify your tax burden. This investment vehicle would give you the same options as a traditional IRA but you would be taxed before making the contributions instead of upon withdrawal. This can be advantageous to the person that believes they will have a larger tax burden when they are taking money out of the accounts in the future.
The Plan for You
A one-size-fits-all answer is going to be wrong for a lot of people when you are discussing financial planning. Your particular needs and circumstances need to be taken into account and that means the optimal choices for you are going to be dramatically different from the person down the street.
It is best to consult a trusted advisor in this case. The one thing that we can say with certainty is that if you are not contributing to your 401(k) enough to maximize your company’s match, you are missing out on a lot of money. If an advisor does not tell you the same, you should talk to another advisor. Maximizing the match should be your first priority. Once that is done, you can consider best possible options concerning additional contributions to any retirement planning.