Ask an Expert: 401k, IRA or Both?

401(k), Expert Q&A, IRA, Retirement & Investing
on July 23, 2014

Dear Kirk: Should I have both an IRA and a 401k? And what happens to my 401k if I change jobs?

Do I need a 401k AND an IRA?

Kirk Says: Let’s start with the understanding that both the IRA and the 401k are qualified plans that typically behave the same way in regards to tax advantages and requirements. One thing to consider beyond these is the Roth IRA, which gives you some diversity, as opposed to the traditional IRA or 401k when it comes to the tax treatment of the money. In my opinion, the notion of having both an IRA and a 401k should be replaced by having a Roth IRA and a 401k. And that being the case, the answer there is yes, you should have both.

Let’s explore the benefits of the most common 401k plans. These typically have an employer match—this is free money to you. Let’s say your employer’s plan has a dollar-for-dollar match up to 3 percent and your annual salary is $50,000. So if you contribute 3 percent, which is $1,500, then your employer is going to match that with an additional contribution of $,1500. And as an added bonus, your tax bill will be reduced by your tax rate times the same $1,500. So how about a “cheers” to our federal government giving us such a tremendous tax break?

But before we get too ecstatic about this windfall, the rub in this deal comes when we start taking the money out of the account. That’s when you will pay those taxes. And if you take the money before you are 59 and ½ years old, then you will also probably pay a 10 percent tax penalty. Here’s where the diversification through using the Roth IRA comes into play. You see, all the money that you put into the Roth IRA has been taxed already, and when you start to withdraw that money in retirement, you can do so tax-free.

As to your second question, if your balance is more than $5,000 in your account, then you can leave the money in the plan even after you have left your previous employer. However, you’ll want to carefully look at how the money in the plan is invested. Is it in mutual funds or employer stock? There is a certain amount of risk leaving the money in employer stock with the employer sponsored plan.

For example, what if the employer changes the plan administrator in the midst of falling stock prices and the plan goes into a blackout period during the change? You could see your account values change considerably and not be able to do anything about it. The less risky play here would be to rollover the funds in the 401k from a previous employer into a traditional IRA account.

I would recommend that you spend some time consulting with a financial advisor any time you are considering a job transition. It just may save you thousands of dollars.

Kirk Gwaltney is a Chartered Financial Consultant and a Chartered Life Underwriter in Brentwood, Tenn. Learn more about him at

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