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Are You Ready to Invest Beyond a 401(k)?

By Christy Bieber – Aug 25, 2020 at 11:17AM

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There's another account you should be using, but probably aren't.

When it comes to retirement investing, it pays to take advantage of accounts that provide tax breaks for savings. Sadly, many people are passing up the chance to invest in one of the most accessible of those accounts -- the IRA.

In fact, according to the Center for Retirement Research, only around 15% of people of all ages actively put money into one. Although more people have IRAs, most of the funds in them come from rolling over workplace investment accounts rather than from direct contributions. 

If you aren't among the small minority of people actively putting money in an IRA, you could be missing out on a golden opportunity. Here's what you need to know. 

Hand putting coin in jar labeled retirement, with clock next to it.

Image source: Getty Images.

IRAs offer some benefits that 401(k)s don't

One of the biggest benefits of an IRA is that you don't need an employer to set one up for you. You can open an IRA at any bank, brokerage, or other financial institution on your own. In fact, it takes just a few minutes to open your IRA online with most brokers, and there's generally no minimum investment required and no monthly account fees to pay. 

IRAs, like 401(k)s, provide the chance to make contributions with pre-tax dollars, although some high earners who have a workplace retirement plan (or whose spouse has one) could find themselves ineligible to make deductible contributions.

Another key difference, however, is that once the money is in your IRA, you usually have a far broader choice of what to invest it in than you would with a 401(k). While you're usually limited to picking from a few different funds in a 401(k), you can invest money deposited into your IRA in virtually anything you want (as long as your brokerage offers it). 

You also have the option to choose to contribute to a Roth IRA, rather than a traditional one. Roth IRAs take after-tax contributions, but money can grow and be withdrawn tax-free. For those who want to avoid taxes on future Social Security benefits or who are concerned their tax rate will be higher in retirement, opting for a Roth IRA makes a lot of sense. Of course, while some employers provide the option to invest in a Roth 401(k), many do not -- and if yours isn't one of them, contributing to a Roth IRA would likely be your best option for enjoying tax-free withdrawals. 

Should you start investing in an IRA?

As you can see, IRAs aren't just another version of a 401(k) -- they have their own advantages. And while you don't want to put money into one until you've invested enough in your 401(k) to earn any matching funds your employer allows, contributing directly to an IRA could provide more freedom and flexibility. 

If you aren't one of the 15% of Americans who is making IRA contributions, think about becoming one if:

  • You're eligible to make deductible contributions to a traditional IRA based on income, or eligible to make any contributions at all to a Roth IRA based on household income
  • You've maxed out any employer match you're entitled to and you still have some money left over to save for retirement
  • You want the option to invest in a Roth account and your workplace doesn't offer one, or you want a wider pool of potential investments than your 401(k) offers 

If these sound like your situation, you should become one of the small minority of Americans making IRA contributions.

If you've already opened an IRA to accept a rollover from any workplace retirement accounts in the past, you can begin putting money directly into your IRA ASAP. If you don't have one at all, shop around to find the right broker, open your account, and build contributions to it into your budget. Your future self will thank you as your IRA helps you get on the path to a more financially secure retirement. 

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