Why Take Advantage Of Contributing To A 401(k) & IRA

“Save as much as you can, as often as you can.” If you’re a working adult saving for retirement, you’ve likely heard some version of this advice over the years. But saving isn’t just about how much money you have now or how often you add to your savings. It’s about where you put your hard-earned money to set your future self up for financial security. Ideally, retirement savings accounts can grow your earnings through strategic investments so you have enough money to support your retirement lifestyle.

Individual retirement accounts (IRAs) and 401(k)s are the two most common options for growing your savings, so how can you know which is right for you? Do you even have to choose? We’re here to help you manage contributions to your 401(k) and/or IRA to maximize how much you can save and earn over time.

Can You Have A 401(k) & An IRA?

Not only can you have an IRA and 401(k), contributing to both is a smart way to diversify your retirement portfolio. Contribution limits dictate how much you can add each year, so utilizing both allows for the greatest growth potential. If you already have 401(k) savings through your employer, don’t worry about limiting yourself to that one solution. By adding an individual retirement account to the mix, you give your money more opportunity to grow while gaining additional tax advantages.

What Is An Individual Retirement Account?

An individual retirement account (IRA) is a personal retirement savings plan you can open and manage independently through a bank, brokerage firm or mutual fund company. Depending on the type of IRA, your money grows tax-deferred or even tax-free for more predictable retirement income.

The two main types of IRAs are traditional IRAs and Roth IRAs. Each provides different benefits depending on your current financial situation and when you prefer to receive your tax benefits.

What Is A Traditional IRA Vs. A Roth IRA?

With a traditional IRA, contributions are typically tax-deductible in the year you make them and money grows tax-deferred, meaning you only pay taxes on withdrawals in retirement. With a Roth IRA, you pay taxes on contributions upfront, allowing for tax-free growth and withdrawals. In other words, for traditional IRAs, you get tax benefits today but will pay taxes when you make withdrawals in the future. For Roth IRAs, you do pay taxes now but get tax benefits later when you make qualified withdrawals tax-free. To be considered a "qualified withdrawal," you must be at least 59½ years old, and your Roth retirement saving account must have been open for at least five years.

Another key benefit of a Roth IRA is that there are no required minimum distributions (RMDs) during your lifetime, offering greater flexibility in how and when you access your funds in retirement. For traditional IRAs, you generally must start taking RMDs from your account once you reach a certain age (73 as of 2026).

Comparing IRA & 401(k) Retirement Savings Accounts

Now that you know what an individual retirement account is and what types are available, you can better understand how they differ from 401(k) savings. Both IRAs and 401(k)s can play an important role in your retirement savings journey, but these retirement savings accounts have key differences to be aware of, including:

IRA Vs. 401(k) Contribution Limits

The Internal Revenue Service (IRS) sets annual contribution limits for both IRAs and 401(k)s which fluctuate from year to year. Limits for 401(k) savings are typically higher than IRA limits, allowing you to save a substantial amount each year. As of 2026, here are the IRA vs. 401(k) contributions limits:

• IRA - $7,500 for individuals under 50; $8,600 for individuals over 50
• 401(k) - $24,500 for individuals under 50; $32,500 for individuals over 50

Income Eligibility For IRAs & 401(k)s

There are no income limits preventing individuals from making contributions to a 401(k). However, you might not be able to contribute the full amount to a Roth IRA, depending on your household income. Additionally, your total tax deductions for traditional IRA contributions could be limited by whether or not you have a retirement plan through your job or by how much you earn. These limits can affect whether contributing to a 401(k) and/or IRA is most beneficial for you.

IRA & 401(k) Investment Flexibility

While many IRAs and 401(k)s offer a variety of investment options, including mutual funds, exchange-traded funds (ETFs), individual stocks and bonds, the options available depend on the type of account and where it’s held. In general, IRAs have a wider variety of investment options, while 401(k)s are typically limited to select options from your employer. Understanding these choices and how they align with your risk tolerance and goals is essential for diversifying your retirement portfolio.

Withdrawal Rules For IRAs & 401(k)s

Understanding the specific rules for withdrawing funds from each type of account is vital to avoid potential penalties and unexpected taxes, especially before age 59½. If withdrawals are made before you reach this age, you may face the following penalties:

• Traditional IRA - pay income tax plus a 10% penalty
• Roth IRA - no penalty for withdrawals on your contributions; pay income tax plus 10% penalty on withdrawals on your earnings
• 401(k) - pay income tax plus a 10% penalty

Both traditional IRAs and 401(k)s have required minimum distributions beginning at age 73. Roth IRAs remain tax-free with no RMDs.

Tax Benefits Of IRAs

Many people seeking retirement savings account options take advantage of IRAs for their tax benefits. Roth IRAs in particular stand out compared to traditional IRAs and 401(k)s for their ability to grow and accept withdrawals tax-free. With a Roth IRA, your contributions are made with after-tax dollars. This means you don't get a tax deduction in the year you contribute, but because taxes are automatically accounted for in your contribution, you aren’t taxed on qualified withdrawals in retirement.

The Importance Of Diversifying Your Retirement Portfolio Beyond 401(k) Savings

While both IRAs and 401(k)s are excellent tools on their own, combining them can significantly boost your overall retirement savings, offer valuable tax flexibility and ultimately help you build a more secure financial future for yourself. By contributing to both a 401(k) and an IRA, you can increase your total savings beyond the annual limits of a single account. This allows you to accelerate your progress toward your retirement goals.

Diversifying your retirement portfolio also allows you to mix up your tax strategies. Having a blend of taxable accounts like 401(k)s and traditional IRAs and tax-free accounts like Roth IRAs gives you a lot of flexibility in retirement. For example, if tax rates are higher when you retire, you can take more money from your tax-free Roth account. If they’re lower, you might choose to take more from your 401(k) or traditional IRA, where withdrawals are taxed. This level of control can make a substantial difference in your long-term financial well-being.

In some cases, you may even choose to transition your 401(k) into an individual retirement account at your bank after you retire. This allows you to move your money closer to home so you can work with a trusted team to manage distributions. Moving your retirement savings to a bank IRA can also take your money out of the investment market, reducing your exposure to market downturns while continuing to earn interest on your savings.

How To Start An Individual Retirement Account

To start an individual retirement account, you typically must work with a bank or broker to establish a traditional and/or Roth account. You can then transfer funds or set up recurring payments for your IRA. Depending on where your IRA is held, your retirement savings may earn interest through a bank account or be invested to continue growing over time.

At Rivers Edge Bank, we offer traditional, Roth and simplified employee pension (SEP) IRAs, acting as high-yield savings vessels to continue growing your money. Our retirement savings accounts are FDIC-insured, protecting you from market crashes and preserving your hard-earned money. We charge no fees, so the money you put into your IRA is yours to keep.

Open A Retirement Savings Account With Rivers Edge Bank To Start Saving Today

As a local bank, Rivers Edge Bank is proud to work with individuals and families in our South Dakota and Iowa communities for the long-haul. When you open an individual retirement account with our team, you gain the support and security you need to feel confident in your retirement savings. Explore our library of financial literacy resources to learn more about saving for retirement and managing money, and contact us to start your IRA today.

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