Unlock a Wealthier Retirement With an IRA

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IRAs can let you boost your annual retirement contributions and even provide tax-free money in retirement. Read on to learn more about these accounts. [[{“value”:”

Retirement savings goals can be lofty, especially if you want to live a certain lifestyle once your career comes to a close. And while 401(k)s offer a simple, convenient way for many to reach those goals, they aren’t the only type of brokerage account you should consider.

In fact, if a 401(k) is your only retirement account, you could be missing out on a potentially critical part of your retirement savings plan: individual retirement accounts (IRAs). Here are a few ways that these accounts can help pave the way to a wealthier retirement.

IRAs have separate contribution limits from 401(k)s

The annual contribution limit for a 401(k) is substantial ($23,000 for those under age 50 as of 2024, $30,000 for those 50 and over). But that doesn’t mean there isn’t value in also contributing to an IRA.

In fact, the IRA contribution limit ($7,000 for 2024, or $8,000 if you’re 50 or over) is separate from that of a 401(k). So you can contribute to an IRA without having to reduce your 401(k) contribution — and those extra contributions can really add up.

If you’re interested in boosting your retirement savings, you can explore our list of the best IRA accounts of 2024.

Let’s say you max out your IRA contribution limit this year. That money would amount to over $120,000 if invested over a 30-year period. That’s if your investments earned a 10% annual return, which is just below the average return for the S&P 500 over the last 10 years.

IRAs give you access to more diverse investments

With a 401(k), you only have access to the investments offered by your employer. And those are often limited, when compared to IRAs. For example, on average, 401(k)s offer around 28 investment options. These can include things like target date funds and asset allocation funds. Meanwhile, IRAs can offer thousands of investment options, including mutual funds, ETFs, stocks, and bonds, among others.

This stark contrast happens because IRAs are offered by many financial institutions, each with their own lineup of investments. So you can shop around until you find an option that suits your needs. Meanwhile, 401(k)s are tied to your employer and are therefore entirely dependent on what they choose as options for you.

You can hedge against high retirement tax bills with a Roth IRA

There are two primary types of IRAs that are available to most workers: traditional and Roth. Traditional IRA contributions are generally tax-deductible now, but you pay taxes once you start withdrawing funds in retirement. Roth contributions won’t reduce your taxable income now, but they can be tax-free in retirement.

So if you’re looking for a way to hold onto more of your cash in retirement, a Roth IRA can be an excellent strategy.

In order to get that tax-free cash, however, you do have to follow certain rules. For example, your first distribution must be made at least five years after opening and funding the account. And you have to be at least 59 1/2 years old when you withdraw the funds, or become disabled, to get tax-free distributions.

Plus, you can withdraw contributions from a Roth IRA (but not investment gains) whenever you need to, tax- and penalty-free.

Roth IRAs don’t have required minimum distributions

Traditional IRAs and 401(k)s require you to start taking cash out when you reach age 72. But Roth IRAs don’t have this requirement until the account holder dies. So that tax-free cash can act as both a tax-buffer and a cushion for your later years. That way, if your 401(k) runs a bit leaner than you expected, you’ll still have something to fall back on.

Saving for retirement can be a tricky proposition. But if you’re willing to look into your investing options outside of a 401(k), you can find ways to solve future problems before they pop up. And that can lead to a wealthier retirement.

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