401(k)s and IRAs: Pros and Cons of Having Two Retirement Accounts | WSJ Your Money Briefing

[Music] here's your money briefing for Tuesday June 6th I'm J.R Whelan for the Wall Street Journal millions of workers have 401k accounts to put money away for retirement but is that enough Wall Street Journal contributor Michael Pollock joins us with the pros and cons of opening up an IRA in addition to your 401k so first of all Michael what's the difference between a 401K retirement account and an IRA and how do they allow people to invest so a 401K retirement account is an account offered through your employer the employer usually deducts money from each paycheck and that money is invested in an account on your behalf the employer designs the account determines what the Investments are in the account and it's a fairly smooth process most people don't even really pay a lot of attention to where the money is going in the 401K and as a result of it being so easy it's a great way for people to save up money for eventual retirement an IRA or individual retirement account on the other hand is an account that is not held necessarily through an employer anyone can have an IRA you can have one even if you're not working and the IRA does not have a set menu of Investments people have to decide on their own where the money in the ira is going to be invested they have to choose the funds or the ETFs or whatever they want to put the IRA money into and there's no regulation that would prevent someone from having an IRA alongside their 401K that's right there's no reason why you can't have both both so what's the advantage of contributing to two retirement plans at the same time in the 401K plan the IRS limits your annual employee contributions to twenty two thousand five hundred dollars for people who are less than 50 years of age there's also a limit on how much you can put into an IRA in a year and that's 6500 for someone who is under 50 years of age but if you only contribute to the 401K plan you're obviously putting away less money than you would if you contributed to both if you take the twenty two thousand five hundred dollars that you contribute to the 401K and you add the six thousand five hundred dollars that you're contributing to an IRA that's essentially almost 30 percent more per year and the other thing is the IRS from time to time increases those limits so over time you could be contributing more and are there disadvantages to having to retire government accounts going at the same time well it makes more work for someone who wants to keep an eye on both accounts because the choices are are so Broad in an IRA someone really has to think a little bit about how they want to invest that money there is a possibility also of racking up more fees or more trading costs if you have an IRA so you have to think a little bit about how you're going to invest that money in a cost efficient way so we're talking about IRAs and 401ks we often hear a lot about Roth IRAs and some companies are now allowing workers to open up Roth 401ks how do those differ from traditional IRAs and 401ks and why would someone consider those well so the biggest difference between the traditional IRA and the Roth IRA is the type of money that you're contributing with a traditional IRA the money is on a pre-tax basis which means that when you eventually start taking withdrawals from that Ira that money is going to be taxed your ordinary income rate with a Roth IRA Europe contributing after tax money so that's money you've already paid tax on and if you follow the IRS rules to the letter by the time you retire then that money can come out possibly tax-free and the advantage of that is that if you have a large 401k plan and also a sizable Ira if you're taking the required minimum distributions which are what the monies are known as after you retire starting to withdraw on those accounts you could have a sizable tax liability and you don't really have a lot of control over how much income you're getting from those two different accounts but on the other hand if you have a Roth IRA and a 401k then the money you take out of the Roth IRA is not being taxed in your overall tax liability could be lower oh so more money in your pocket that's right and you also have more flexibility about how much in distributions you're taking because with a Roth IRA you don't have any required minimum distributions now there's this other newer account called a Roth 401k that more and more companies have started offering and those are very similar to a Roth IRA right now they do have required minimum distributions but that's going to change under the law in 2024 there will not be required minimum distributions so a Roth 401k plan also could be advantageous in the sense that it will mean a lower tax liability after you retire now what if someone doesn't have a 401k maybe because they work part-time or they're self-employed what retirement plans should they consider to maximize the retirement savings well there could be a lot of people in that situation a traditional IRA or a Roth IRA would probably make the most sense there the Roth IRA is very popular among advisors advisors really think that a Roth IRA could be the best choice there aside from the fact that there aren't any required minimum distributions in retirement there also is more flexibility about your withdrawals from a Roth IRA which you might be able to do even before retirement depending on the situation all right that's Wall Street Journal contributor Michael Pollock and that's your money briefing I'm J.R Whalen for the Wall Street Journal foreign

Channel: WSJ News

Views: 88,918

Keywords: retirement accounts, 401k, 401k account, IRA, roth ira, roth 401k vs roth ira, wsj, your money briefing, pros and cons, retirement savings, retirement planning, personal finance, annual retirement contributions, IRS, investments, traditional iras, pre-tax basis, taxes, financial news, 401(k) account, investing, retirement, ira, stock market, compound interest, employer retirement matching, employee retirement income security act, employee retirement, two retirement accounts, pfin

Id: xl4i6gAP-k4

Length: 6min 29sec (389 seconds)

Published: Tue Jun 06 2023