My Employer Doesn’t Offer a 401K – Should I Open an IRA?

Retirement may seem far away, but chances are it crosses your mind from time to time. Regardless of whether you have a retirement account or not, you may question the strategy you are taking. Many people wonder if their timing is right. While there is no “correct” answer that can apply to everyone for every question, chances are you can find guidance that you can relate to your scenario.

Does It Make Sense To Open an IRA if Your Employer Does Not Offer 401K Accounts?

For those who cannot sign up for a 401K because their employer does not offer one, other options are available. Namely, IRA, or individual retirement accounts, are a tax-advantaged retirement account that should play a key part of anyone’s retirement strategy if they find they can’t get a 401K. As the name implies, no employer sponsorship is needed in order to open an IRA account. The exact details for how the account works vary based on a few factors. Even if you already have a 401K, you should strongly consider adding an IRA to your arsenal of retirement investment accounts. Read more below.

Should You Open An IRA If You Already Have a 401K?

People with a 401K account, with or without employer contribution matching, both stand to benefit by having an IRA. This is because an IRA is complementary to a 401K rather than a replacement for it. You do not have to choose between the two if you are eligible for both. Given that it is a tax-sheltered account, it is to your advantage to contribute to an IRA if you are maximizing your 401K contributions to the account limit ($18,000 annually for the 2015 tax year; an additional $6000 “catchup” contribution for people age 50 and older).

Types of IRA Accounts

While you do not need to decide between opening only one of either a 401K or IRA account, there are two main types of IRA accounts available. Individuals may chooose between a “traditional IRA account” or a “Roth IRA account”. The differences between the two are primarily in how you are taxed. Your choice should be based on whether you anticipate being in a higher or lower tax bracket during your retirement age. Your current age may influence this decision, depending if you are getting a late start to your retirement plans or not.

Traditional IRA Account Details

In the 2015 tax year, Traditional IRA accounts have a $5,500 contribution limit, with an additional $1000 “catchup” limit for those aged 50 and older. The way a traditional IRA account works is your money is added to the account and allowed to grow, taxed once you withdraw from the account in retirement. Early withdrawals (occurring before you turn 59.5) result in an additional 10% penalty fee. Depending on your income and filing status, you may be eligible to make a tax deduction for your contributions. This account type normally makes sense when your future income is expected to be taxed at a lower rate than it presently is.

Roth IRA Account Details

A Roth IRA, unlike its traditional brethren, takes the impact of taxes before it enters the account. The investments are then allowed to grow tax-free until withdrawal. Roth IRAs are treated differently than Traditional IRA in the event of early withdrawals.

The Roth IRA has the edge here. Contributions (before growth) may be removed without a fee. Gains on those contributions are subject to the same 10% fee (if before age 59.5). This gives additional flexibility to those who may be concerned about saving for their retirement if they feel an emergency may come up or they may otherwise need to take out money. While this should not become a habit, the flexibility comes as peace of mind to some people.

There are several other benefits to Roth IRAs as well:

• No forced withdrawals – Traditional IRAs require you to start taking out a minimum amount each year once you are 70.5 years old
• No contribution age cutoff – Traditional IRAs do not allow you to add more money to the account once you are forced to withdraw at 70.5

Is a Roth or Traditional IRA Better?

The ultimate question, whether to go with a Roth IRA or a Traditional IRA, is up to you in the end. Only you are the most familiar with your financial situation. There are also income limits which may restrict your ability to invest. For those who can open an IRA, however, the tax benefits of growing your investments without annual capital gains taxes allows your accounts to grow much bigger than a regular investment account (thus the age-related, income-related, and contribution amount restrictions). It can safely be a complement to a 401K or allow you to start saving should you not have a 401K available.