Have you ever heard – or used – the phrase, “I’m covered at work?” It comes in handy for putting off meetings with your Certified Financial Planner™. But if you’re serious about Phase II: The Accumulating Wealth Phase, you probably know already that you should never take cover under clichés. And so it is with retirement. You should have an IRA even if you’re in an employer plan.
If that sounds like overkill, consider the following . . . .
Maximizing Retirement Contributions
Even if you have an employer retirement plan, you can accelerate the growth of your portfolio by adding IRA contributions on top of it.
Let’s say that you participate in your employer plan at 10% – the percentage you are presented with when filling out the forms. If you earn $60,000 per year, you’ll contribute $6,000 into the plan each year. But if you also make an IRA contribution, which you can do up to $5,500 (or up to $6,500 if you are age 50 or older), you will nearly double the amount of money that you are contributing to your retirement portfolio each year.
Many people will frown on using an IRA if the contributions are not tax-deductible in the year that they are made. That however should never stop you from making a contribution. Though the contributions themselves may not be tax-deductible, the investment income that you earn on your contributions will be tax-deferred. That will enable you to build up your IRA plan in much the same way that you do with your employer-sponsored plan.
And when retirement does come, non-deductible IRA contributions can be withdrawn from the plan on a tax-free basis – after all, it will be the return of money on which you did not get a tax deduction. This tax-free money can come in handy at retirement. Never let non-tax deductibility of contributions be a reason for not funding and IRA!
Making Up for Lost Time
What happens if – like a lot of people – you have been unable to adequately fund your retirement plan early in your life? Maybe you were weighed down by a low income in combination with a very high cost of raising a family. Maybe you experienced financial difficulties that were brought on either by career troubles, or even by health or personal issues. Whatever the reason, it looks as if your chances of retiring are on the weak side.
If that is the case, the advice given above applies even more for you. Using an IRA in combination with employer-sponsored plan is a way to help you make up for lost time. You can diversify your investments by having multiple accounts.
More Investment Options
One of the most compelling reasons for having an IRA even if you have an employer-sponsored plan, is that not all employer plans are all the great. Many have limited investment options, and sometimes the returns they have aren’t very dynamic.
The typical IRA plan, since it is invested with an advisor, offers far more investment choices than what you’ll find in an employer plan. For example, unlike the employer plan, you may be able to invest in various sector funds, individual stocks, and even directly in US government securities. These options may increase your portfolio performance.
Managing Your Own Investments
Some people are perfectly content to have others manage their portfolios. They have no problem keeping their money in an employer-sponsored retirement plan that will divide the money up between as many as a half-dozen professionally managed mutual funds.
But what if you’re more of a ‘do-it-yourselfer?’
An IRA is a self-directed plan, which means you have complete control over the investments in the plan. If you have had above average success in investing on your own, you may prefer having an IRA to invest in yourself, rather than simply allowing your money to sit passively in an employer-sponsored retirement plan.
Having an Account to Roll Your 401(k) Into
It is an unfortunate reality in today’s job market that job security is nearly a thing of the past. It’s not unusual for someone today – even a very accomplished professional – to hold several positions over a 10, 20, or 30-year period. If each job has its own 401(k) plan, you’ll most likely need to roll it over into something else when you move on.
You could always roll over the plan into that of your next employer, but that’s not always a desirable outcome. If you have an IRA plan up and running already, you’ll already have a place to roll your employer 401(k) plans into when your time at the employer is over.
A Must if You Want to Retire Early
Millions of workers would like nothing better than to retire early. As a Christian, this can take on added significance. While others may be interested in early retirement so that they can take on a life of recreation and leisure while they are still young enough to enjoy it, your interests may be centered on freeing up your time to take on more mission and volunteer work. This can give the whole concept of early retirement an eternal purpose.
But if you want to retire early, you’ll have to go above and beyond the normal efforts people make in regard to retirement. You’ll have to save more money, and even to invest it at least somewhat more aggressively. The best way to satisfy both requirements is by having multiple retirement accounts, including one or more that you have complete control over – an IRA is perfect in this role.
Set up and regularly fund your own IRA, even if you already have an employer-sponsored retirement plan. The benefits of doing this are simply too obvious to ignore.
What are your thoughts? Do you see the value in having an IRA plan even if you have an employer plan? Leave a comment!