Issue #69: It’s a nice day to debate IRAs and 401(k)s

November 18, 2020 // ISSUE #69

Hi y’all —

A recent survey found that seven in 10 Americans are feeling more nostalgic right now than ever before, and I am definitely one of them. I’m not sure if it’s the lockdown, the election, the holidays or what, but I find myself thinking often about the past.

I was a blogging fiend back in high school, so it’s not hard for me to figure out what was happening in the life of Julia on any given day of the late 2000s. For example, on Nov. 14, 2007, “I put my hand in my pocket and found SEVEN quarters,” which I used to buy “a nice cold Coke Zero from the school vending machines.” On Nov. 19, 2007, I went to a Miley Cyrus/Jonas Brothers concert (of course). On Nov. 28, 2007, I announced that “I have now started listening to ‘Stacey’s Mom’ by Fountains of Wayne for long periods of time.”

Thrilling stuff.

It’s silly, but it makes me wonder what I will be doing 13 years from now. Or 26, or 52. Will I be settled down? Will I be working in journalism? If I’m retired, will I have enough money saved?

As we’ve discussed previously, I contribute to a 401(k) plan through my employer. But do I need an Individual Retirement Account instead of — or in addition to — my 401(k)? What are the pros and cons of IRAs?

Ubiquity Retirement + Savings’ Andrew Meadows agreed to help me untangle it all. He began by pointing out one major difference between 401(k)s and IRAs: The former is connected to my workplace, while the latter is not. (Hence the name.)

In his mind, 401(k)s are set up to benefit the employee, while IRAs are “purely investment vehicles.” The annual 401(k) contribution limit for 2021 is $19,500 compared to just $6,000 for IRAs.

“If you’re looking at starting an IRA, that’s good and wonderful, but you’re not going to save nearly as much,” he says.

To answer my next question: Yes, I can have both. Having a 401(k) is nice because my company may offer to match funds I put away for retirement. That money also may come out of my paycheck before it appears in my checking account, preventing my shopaholic self from seeing — or spending — it before moving it to savings.

But IRAs have perks, too. If, for example, I want to quit and sever ties with my job but keep saving for retirement in a portable way, an IRA can be a useful place to roll over my 401(k). I can also use it to consolidate multiple 401(k)s from various jobs that may pile up over time. As Meadows puts it, IRAs tend to be “an independent and individual tool for people who want a little more freedom.”

So while the 401(k) is a more powerful savings plan, the IRA is a more flexible one.

Peter Hunt, a CFP and director of client services at Exencial Wealth Advisors in Oklahoma, said he actually recommends a “savings priority order” to young investors.

First, I should contribute to my 401(k) up to the amount that my employer matches. If I have income left over to save, then I should see if I’m eligible for a Health Savings Account. Finally, if I have income left over after THAT, I should contribute to a Roth IRA.

Traditional 401(k)s and IRAs are pre-tax, so the contributions come out of my gross paycheck, and are tax-deferred, meaning I pay income taxes on them once I withdraw the funds. But with the Roth option, I pay taxes up front and then withdraw the money tax-free in retirement.

Plus, as long as I’m taking out the contributions — not the earnings — there’s also no penalty. With traditional 401(k)s and IRAs, I have to pay income taxes plus a 10% penalty if I take out money before age 59 ½ outside of certain limited circumstances. (Usually. Right now there's an exception through the CARES Act.)

“The Roth IRA gives you a lot of flexibility,” Hunt adds. “You can pull contributions out at any time for any reason.”

To that point, Meadows said there’s nothing wrong with maintaining a 401(k) at work and throwing $500 into a Roth IRA every quarter or time I get a raise. That way I’m taking advantage of the compound interest as well as my compensation benefits.

“The importance here is diversification," he says. "Don’t put all your eggs in one basket."

THE BOTTOM LINE

(but please don't tell me you scrolled past all of my hard work)

Because of the way 401(k)s are structured, I should always contribute up to the maximum my company matches for 401(k)s. But if that’s not an option for me, if I want to roll over funds or if I still have more money to save, opening a traditional or Roth IRA could be smart.

Jamie Ohl, executive vice president and president of retirement plan services for Lincoln Financial Group, told me I don’t necessarily have to make the decision on my own. Since it involves weighing the tax bracket I’m currently in and the tax bracket I think I’ll be in when I retire, it’s not a bad idea to get advice from a financial advisor.

“Ensure that you are educated on your options and how you can maximize them,” Ohl says.

via GIPHY

RECEIPT OF THE WEEK

check out this crazy celebrity purchase

via Instagram

The Rolling Stones’ Keith Richards is doing pretty much what we all are in quarantine: giving his dogs too many treats and exclusively wearing sweatpants. In an interview with GQ, the legendary musician revealed his love for his $150 Ugg boots. I don’t have a joke here, I just think it’s funny to imagine Keith Richards padding around his house in Uggs. Oh wait, I got one — I guess wild horses couldn’t drag him away from comfy shoes.

INTERNET GOLD

five things I'm loving online right now

1	This PopSugar piece on how the SNL costume department recreated Kamala Harris’ white pantsuit in a mere 85 minutes is fascinating. “[It's] an impossible task for any other place other than Saturday Night Live,” the designer said. “Nowhere else in the world could this happen.” I believe him.
2	I love this interview with oil painter Anna Weyant, who says she listens to Simple Plan’s “I’m Just a Kid” on repeat when trying to focus. I’m more of a “Welcome to My Life” girl myself, but game recognize game.
3	If at first you don’t succeed, try, try again.
4	Check out this lyric generator that uses code to write songs in the style of whatever band name gets texted to 315-659-7427. Then browse through the oddly accurate examples other people have shared online, like Bruce Springsteen, Death Cab for Cutie and The Cure.
5	Been spending a lot of time recently on Chipmunk TikTok, just watching these little guys bounce around and snack on nuts. Dinky, Stinky, Squishy, Chippie, Mooshy — what more could you possibly need?

401(K)9 CONTRIBUTION

send me cute pictures of your pets, please

via Kathy

Meet Cora, a sweet rescue dog. Cora keeps both a 401(k) and a Ruff IRA for her retirement savings.

Gonna go scroll through my own Instagram for the mems.

See you next week.

Julia

P.S. Last issue's discussion about password managers continued in my inbox. Scholar Roy wrote in to say his company uses Roboform, which syncs across devices and has a handy autofill option. I hadn't heard of that tool, but now I'm checking it out.

P.P.S. Do you have an IRA? What are your opinions on Uggs? If you had a chipmunk, what would you name it? Send questions/comments/concerns to julia.glum@money.com or @SuperJulia on Twitter.

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Issue #69: It’s a nice day to debate IRAs and 401(k)s

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