Even if you have a 401(k) at work, there are good reasons to also contribute to an individual retirement account -- Roth or traditional.
It is important to contribute the maximum amount your employer matches in your 401(k), but often that match is only 3 percent of your pay. If you don't take it, you're leaving money on the table. But putting all your retirement savings in your employer-sponsored plan may not be your best route, says Dan Keady, Certified Financial Planner professional and director of financial planning for TIAA-CREF.
He believes that also saving in an IRA gives you much greater retirement planning flexibility for these three reasons.
More investment options. Your 401(k) is probably limited to the investments that your employer chose. That's not so with an IRA.
Withdrawals without penalties. You can withdraw money from your IRA to buy a first home or to pay higher education, medical and disability expenses under some conditions without penalty, although you do have to pay the taxes if you tapped a traditional IRA.
Greater tax flexibility in retirement. Having part of your money in a Roth IRA will increase your ability to manage your marginal tax rate in retirement. Tax rates increase in stages. If you can pull some income out of tax-advantaged buckets, you can spend money without going over the cap that throws you into a higher tax bracket. By converting a traditional to a Roth IRA, you can make adjustments as you approach retirement, but you'll probably pay less tax overall if you save in a Roth IRA when you are younger and your income is lower.
Keady cites a TIAA-CREF survey that concluded that about 50 percent of people say they don't understand how IRAs work and 80 percent don't have one, probably because they don't see their value. If you're among this majority, getting an expert to review your retirement savings strategy with an eye toward IRA possibilities could make an important difference, Keady believes.