When Should You Open An IRA?

In this post, I’m answering one of the most common money questions that millennials ask me all the time:

Should I open an IRA?

If you’re here, it’s probably because you’ve heard about something called an IRA or maybe a Roth IRA, and now you’re wondering if you should open one. Let’s start with what an IRA is.

IRA stands for Individual Retirement Account, and it’s a type of investing account that allows you to save and invest money for retirement in a tax-advantaged, flexible way. One of the biggest misconceptions is that you have to choose between an IRA and a 401(k). You don’t! You can have both.

When it comes to deciding whether to open an IRA instead of or in addition to a 401(k), here are some points and questions to consider:   

#1 - Do you have a 401(k) or a 403(b) at work?

If the answer is no, then you should almost definitely open an IRA to invest for retirement on your own. If the answer is yes, you may not need to open an IRA for a variety of reasons. Let’s dig into some of them:

Does your employer offer a match?

An employer match is free money, and you should take advantage of that free money all day long. There are no matched contributions in an IRA, however. So it may be better for you to contribute to your company’s retirement plan first, at least up to the maximum match allowed.

How much do you need to invest for retirement each year?

A 401(k) allows you to contribute over three times as much per year than an IRA does. Currently, you can contribute up to $19,000 in a 401(k) or 403(b), whereas an IRA has a contribution maximum of just $6,000.

If you need to save and invest more than $6,000 per year to reach your nest egg goal, an IRA alone won’t get you there. So either a 401(k) or a 401(k) + IRA combo may be the better option. If you’re getting an early start on saving for retirement and don’t need to contribute more than $6,000 per year, then an IRA alone may be suitable.

If you don’t know how much you need to save or how large of a nest egg you’ll need to retire, enroll in one of my courses - MONEY or WEALTH - to figure that out ASAP. Click here for more information.

ReisUP Should You Open An IRA?

#2 - You want to make Roth contributions for retirement

Some employer retirement plans like a 401(k) or 403(b) are only set up to receive traditional, or pre-tax, contributions, not Roth, or post-tax contributions.

If you think Roth contributions are a better option for your current and future tax situation, then you may want to open a Roth IRA in place of or in addition to your 401(k) to take advantage of this tax benefit.

#3 - You want more flexibility with investment options

Because you can choose between a variety of IRA providers that offer access to - in some cases - practically unlimited investment options, you get much more control and choice through most IRAs than you do through a 401(k). Choice is especially important when it comes to the fees you’re being charged. If your company’s 401(k) or 403(b) doesn’t offer low-cost investments, you’re probably better off opening an IRA and investing in funds with lower expense ratios.

#4 - You want some oomph on savings goals

Another viable reason to open a Roth IRA in particular is to give some oomph to some of your long-term savings goals, like a downpayment on a house. Contributions you make to a Roth IRA have already been taxed, so you’re allowed to withdraw them without penalty at any time, whereas you’ll be penalized for taking money out of a traditional 401(k) or IRA.

That means a Roth IRA could offer you a greater return on your money than you’d get in, say, a traditional or high-yield savings account, without tying up all of that money until you’re 59 and a half years old. 

#5 - You want full control over your account

Because you open an IRA yourself, its existence doesn’t depend on who you work for or where you live. It follows you wherever you go and through whatever life stage you’re in. That means one less bit of paperwork to deal with when you switch jobs.

Your Turn

Those are the primary factors you should consider when thinking about opening an IRA. Leave a comment below to let me know if you think an IRA is or is not the best option for you!

Want more?

Want to learn more about setting yourself up for retirement success? Check out our free training called 3 Money Rules of Thumb You Shouldn’t Blindly Follow.

Need help figuring out how much you should be contributing to your IRA every year, or choosing between investment options? Enroll in our MONEY or WEALTH course:


Tara Falcone, CFA, CFP® | Instagram: @reisupllc | YouTube: reisupllc