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My company is switching to a 401k plan provider that allows for both Roth and pretax contributions. If I can make either type of contribution to this plan, why would I want an IRA?

The previous 401k plan provider only allowed traditional pretax contributions, so I was considering opening a Roth IRA so that I could have some tax-free growth.

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I don't think you would want an IRA. Why would you think you would want an IRA in such a situation? :-) – BrenBarn Jun 18 '14 at 19:21
up vote 7 down vote accepted

If your employer matches a percentage of your contributions, then you should try to max out your plan. Once you have completed maxing out your 401k, you may want to open up an IRA for several reasons:

  • will your 401k be enough to sustain your lifestyle in retirement? Your IRA allows you to save even more for retirement.

  • you can invest in all sorts of stuff through your IRA that might not be available in your plan.

  • you can withdraw the principal from your IRA, usually after five years. This serves as another form of savings.

  • IRAs have some asset protection in the event of bankruptcy. A normal savings or investment account usually does not offer such protection.

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Good list. The Roth IRA allows for principal withdrawal any time. Not a great idea, but allowed. – JoeTaxpayer Jun 18 '14 at 20:42

Why would somebody want an IRA if they have a 401K and a Roth 401K?

  • The 401K doesn't have very many choices.
  • The 401K has very high expenses.
  • The 401K doesn't offer matching.
  • They want to save more the maximum of the 401K.
  • They receive a lump sum of money and want to invest it in one shot.
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  • The annual contribution limits for 401(k) and IRA are independent. So if you want to save the most, you would contribute to both.
  • The principal of Roth IRA contributions can be withdrawn at any time without tax or penalty, so it can double as a penalty-free emergency fund.
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