Even if an individual is contributing like a champ to his or her employer-sponsored retirement plan, that person should not overlook the opportunity to invest in an IRA, too. While having a retirement plan at work might impact an individual’s ability to deduct IRA contributions, it does not close the door to the individual retirement account. And using both provides the opportunity to invest more for retirement.
For 2015, individuals may be able to contribute up to $18,000 to his or her employer’s 401(k) plan, plus an extra $6,000 “catch-up” contribution if the person will be age 50 or older by the end of the year. (Both of those figures are $500 higher than the 2014 limits.) Imagine that, starting at age 40, an individual contributed the 2015 maximum (not counting the catch-up) for 25 years and the account earned an average annual return of 7%. That person’s account could hold as much as $1.2 million at age 65.
Team that up with an IRA. For 2015, a person may be able to contribute up to $5,500 to an IRA (plus an extra $1,000 if s/he is 50 or over). Depositing $5,500 a year for 25 years in an IRA that earns 7% a year would hypothetically add nearly $375,000 in assets.
An individual in his or her 20s can see even more dramatic results. If an investor starts saving now, imagine what that person will have when s/he is 65. And even if an individual can’t afford to fully fund a 401(k) plan, anything done now will have a positive impact years from now.
It’s generally advisable to invest in an employer’s retirement plan first, contributing at least enough to capture 100% of any employer match. After all, that’s free money.
Even if one doesn’t max out on the 401(k), once s/he captured the match, it might pay to switch funding to an IRA. With a company plan, investment options are generally limited to those selected by the employer plan administrator. With an IRA, a broader range of investment options may be available. An investment professional can help assess options and whether contributing to an IRA can help meet one’s retirement goals.
Joseph M. Jennings, Jr., CFA, is senior vice president, wealth director, for PNC Wealth Management. He can be reached at email@example.com.