Fidelity Investments, which provides more IRAs and 401(k) plans than any other investment company in the U.S., pointed out today that its 700,000 customers ages 65 to 69 with both a 401(k) and an IRA have an average of $359,000 in their retirement accounts. That's nearly three times as much as customers have who save in only one of these accounts.
Customers of all ages with both kinds of plans have an average of $212,600. The average annual contribution for customers with both plans is $10,300, just about twice what it is for customers with either an IRA or a 401(k).
Those stats are encouraging but they aren't very surprising. Most people who save in both kinds of plans are maxing out their workplace 401(k)s and looking for ways to save more. Or they rolled over a 401(k) from a previous employer into an IRA where their money is still working for them. Or they are currently self-employed and find a self-employment, or SEP, IRA the most convenient, tax-advantaged retirement planning option.
There are lots of good things about IRAs that generally aren't true of 401(k)s, here are a few of them.
- You can more easily take advantage of alternative investments. By putting your money in a self-directed IRA, you can buy all kinds of investments that won't be available to you in a company 401(k) or even a conventional IRA, including buying residential rentals, commercial properties, raw land, private stock, limited partnerships, etc. My accountant husband and I partnered to use money we rolled over from small 401(k)s previously held by former employers in order to buy waterfront property from a bankrupt housing developer at the bottom of the housing market. It turned out to be a really good deal.
- The IRS will allow you to take money out of your IRA for 60 days with no penalty as long as you put it back into the same or a different investment before the time is up. It works like a 60-day, interest-free loan and can get you over the hump if you're expecting your financial situation to be different quickly. If you don't put it back, you'll owe taxes and, if you're you're younger than 59½, penalties.
- IRAs, especially Roth IRAs, are exceptional estate-planning tools, especially for middle-income people. For one thing, they aren't complicated -- you don't need an expert to set one up. The money is there if you need it, but if you don't need this savings during your lifetime, you can leave it to your children, grandchildren or even your great-grandchildren. In the case of a Roth, the money can stay in the IRA, earning tax-free interest for decades until it's needed for college or someone else's retirement.