Should you save for retirement in a workplace plan or IRA? Why not both?


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Even if you save for retirement through your employer’s retirement plan, you may also be able to benefit from contributing to an Individual Retirement Account (IRA).

Many investors don’t realize that you can contribute to both a workplace retirement plan, such as a 401(k) or 403(b), and also to an IRA for the same year. A recent survey released by TIAA-CREF found that 80 percent of Americans are not contributing to an IRA, and 41 percent of those who don’t contribute are also not considering an IRA as part of their retirement strategy. Of that 41 percent, 32 percent said they don’t contribute because they already have a workplace plan.1

However, investing in both accounts can bring benefits, including increased investment options, the ability to save more for retirement and tax diversification.

There are two primary types of IRAs – Traditional and Roth. A Traditional IRA is a tax-deferred individual retirement account, from which eligible investors may be able to receive a tax deduction on their contributions. Generally, you are not eligible for the deduction if you, or your employer, are contributing to an employer-sponsored retirement plan on your behalf. However, as long as your income doesn’t exceed certain deduction phase-out limits, you will be eligible for a full or partial deduction for contributions made to a Traditional IRA, even if you’re investing in a workplace retirement plan.

With a Roth IRA, you make contributions with "after-tax" dollars, i.e., your contribution amount is taxed before you make it. Unlike with the Traditional IRA, your regular Roth contributions are never tax deductible, but distributions may be free from federal and state tax withholding if you meet certain requirements. Because you make Roth contributions with after-tax money, you can withdraw your original contributions at any age, free of federal tax withholding and IRS penalties.2 Learn more about Traditional and Roth IRAs here. Or answer some questions on our IRA calculator to learn which IRA may be right for you.

With either IRA, you can contribute up to $5,000 ($6,000 for those 50 or over) of earned income for 2012 until April 15, 2013. For 2013 you contribute up to $5,500 for the 2013 tax year, or up to $6,500 if you’re age 50 or older. The only requirement is that you have earned income equal to the amount of your IRA contribution.

So if you already have a retirement plan through work, why should you contribute to an IRA? Here are some reasons:

Investment options: IRAs often offer a greater variety of investment options than is generally available through a workplace retirement plan, especially if you open an account through a brokerage firm. That can allow you to have more individual control of where your money is invested.

Tax diversification: Because qualified distributions from a Roth IRA made in retirement are tax-free, unlike funds from a workplace retirement plan, investing in a Roth offers diversification in retirement planning tax strategies. If you have concerns about facing higher tax rates in retirement, saving through a Roth IRA can mitigate those risks.

Access to funds: A Roth IRA offers a lot of flexibility and a huge advantage in that you can take contributions out penalty-free. That provision can help you juggle multiple savings goals, such as accumulating funds for a down payment on a house or future education expenses, along with preparing for retirement.

Maximizing savings: Contributing the maximum to both your employer-sponsored retirement plan and an IRA can help fast track your retirement savings. For the 2013 tax year, you may be able to defer a combined total of $23,000 to both an IRA and workplace retirement plan, or as much as $29,500 if you’re 50 or older.

If you can, it’s best to consider investing the maximum amount to both your employer-sponsored retirement plan and your IRA every year.