Is there any use in using an Individual Retirement Account (IRA) if you already have a 401(k) from your employer?
I assume many small businesses and the vast majority of medium and large businesses offer traditional and Roth 401(k) account plans. Is there any reason why anyone that has these options would set up an IRA?
If you have income from other sources that you would like to invest for retirement, or if you would like to exceed the contribution limits on your 401(k), or if you are dissatisfied with the investment options in your 401(k), then an IRA is an excellent way to add to your investments without forgoing the benefits of the 401(k) plan. There may be other reasons, but these are what come to mind.
Diversity. Never put all of your retirement eggs in one basket.
I don’t think Roth 401(k) plans are very common yet. (I know that my large employer doesn’t yet offer one.) One article I read advised that the smartest thing to do is to invest only enough in the 401(k) to maximize the employer match, and then to max out a Roth IRA (assuming that you’re eligible) and only then make additional 401(k) contributions. The idea is that the tax deferral is less valuable than letting the investment gains grow untaxed.
One way to look at it is to decide if you would like to have too little or too much money in retirement 
Then using online calculators, see what your current 401k contributions will give you for retirement income.
A Roth IRA, separate from your 401k does give you retirement funds which will be tax free. A significant advantage compared to a normal savings or investment account.
Originally, 401k plans were intended to be a ‘third’ leg for retirement, along with your pension and Social Security. IMHO since most firms have abandoned pensions, saving additional funds via a Roth IRA is very important.
When you change jobs you have to put your 401(k) account somewhere, and the simplest way to deal with it is to roll it over tax-free into an IRA. Thus, people who have changed jobs in their career will generally have a (current) 401(k) and IRA’s representing past 401(k) contributions. They aren’t necessarily contributing to the IRAs.
Also, once you roll it over into an IRA you likely have more options for what you do with the money. Most corporate 401k plans, and certainly all of the ones I’ve ever participated in, are limited to a small group of investment choices, and only allow allocation to be changed at fixed times of the year. The IRA can be a brokerage account allowing you to invest the money as you see fit (except for a few investment classes which are not advisable in a sheltered account).
An IRA can help free your country from British tyranny.
Plus, if you have a GEORGE and no IRA, all you’ll get are instrumentals.
Traditional IRAs and 401(k)s both allow your investment to grow untaxed. The difference with Roth IRAs and Roth 401(k)s is that your initial contribution is taxed and your ultimate withdrawals are not taxed. With a traditional IRA and 401(k) the contributions are taxed and your allowed-withdrawals are not. In all cases the investment grows tax free though. And employees can elect to make their 401(k) contributions after-tax Roth 401(k) deductions, making them just like a Roth IRA except the less flexibility in investment choice and other differences (nobody to match contributions, etc), but not the timing of paying tax.
If you already have a 401k, then there are some potential uses of an IRA:
But, overall, the question is like asking “What good is a Honda if you already have a Ford?”
The main reason to have an IRA is when you don’t have a 401k. Many small businesses do not have 401k plans. Some employees don’t qualify to participate even if their company does have one (this often includes part-time, seasonal and temporary workers). Self-employed individuals can set up a 401k, but it’s more expensive to administer than an IRA. Many people contribute less than $5,000 per year to an IRA - so a 401k’s higher limit doesn’t help them.
The advantage of a Roth IRA is that it is post taxed which means the principal is available to withdraw without penalty in an emergency (subject to certain restrictions). I think this is an advantage to a young person starting out who wants the security of the money in the event of a layoff.
It is very likely that you pay significantly higher fees in a 401(k) than in an IRA that you set up yourself. Hence once you have deferred enough into the 401(k) to get the maximum match, your next best option is to fund an IRA to minimize the fees eating into your return. Then when you have maxed out the IRA, go back to putting extra into the 401(k) - the fees may be high, but the tax benefits still make it worthwhile.
Also, you can cash out IIRC up to $10k of an IRA for a first-time home purchase. That’s handy for some people.
It’s actually a disadvantage. It makes it that much easier to raid the retirement account, thus you end up with very little.
Also, most working people earn more while they are working and less while retired, thus taxes will be less for most people.
I suggest against a Roth IRA, it’s a bad way to go.
Thanks for everyone for the help. I don’t need to apply it right now (I don’t make nearly enough to max out my 401(k) and then sock away more), but this is good stuff to know.
It’s all individual. For a young person just starting out with a long time to earn tax free interest and a low current tax burden the Roth is a good choice. If you’re in your fifties in your peak earning (and tax) years and less than a decade until retirement, not so good.
Most of my retirement funds go into a Roth 401k, but I usually dump some money into an IRA around tax time in order to lower what I owe a bit. So that’s why I have both.
Tax rates tend to trend upward over time, though. Paying taxes now protects (somewhat) against large tax increases in the future.
I completely disagree.
Roth IRAs are essential. However, they should not be your sole retirement vehicle. Rather, they are the linchpin in a strategy that takes advantage of the tax rules to minimize tax liability.
In an ideal retirement scenario, you take a combination of Social Security, Roth and taxable 401k/IRA and ensure that your total taxable income is $0. For most retirees, this saves something like $4,000 per year in taxes. This is possible because of the itemized/standard deduction and personal exemptions, and the fact that social Security is taxable only if you have too much in other taxable sources of income.