Why get an IRA if you have a (401)k?

[mitchrad]

Hi everyone,
I’m reading “The Simple Path to Wealth” by JL Collins and am hung up on the idea of a traditional IRA. I am already maxing out my 401k and I make above the income limit for any deduction that would be available for a deductible IRA. What is the point then in having an IRA instead of just investing the money in stocks? In my mind I get more liquidity in just directly investing in the stock market so not sure what I’m missing?
Thank you!

 

[fire_starter]

@mitchrad In addition to what other people have said the advantage of an IRA is basically this

1. It may be lower fees than your 401k, some 401k charge admin fees that can be hundreds of dollars (some employers cover this) however you can open up an IRA at a brokerage and basically be charged zero fees
2. Better selection , with a 401k you get maybe 20-30 mutual funds selected by your company , most are shit funds with high expenses and you are lucky if you get a few good index funds. With an IRA you can invest in just about any brokerage product , you will have access to 100s of low cost index funds
3. its just another bucket to save, you can max out both your 401k and IRA

There are probably other benefits but I think these are the main ones

 

[dalmasy]

@fire_starter Also HSA if you have more money

 

[bubble5]

@dalmasy Should be first considering it's a triple tax advantage account.

 

[dmoban]

@dalmasy Is a HSA something that must be offered by your employer or can anyone set one up?

 

[amyfreeinchrist]

@dmoban You must be enrolled in a high deductible healthcare plan to be eligible for an HSA. It may be offered by an employer but often you can open one yourself as long as you qualify

 

[alex17791]

@amyfreeinchrist To piggyback, also not all high deductible plans are eligible for an HSA so anyone with a hdhp that doesn’t have an hsa offered through work should do their homework to verify that they are indeed eligible for an hsa. Ie, you can’t have an hsa without a hdhp, but just because you have a hdhp doesn’t automatically mean you are eligible for an hsa.

 

[c5780]

@alex17791 Yeah, this is the problem I had with my works health plan. Which reminds me to look at it again at as my wife is pregnant.

 

[kshell]

@dalmasy I don't get the whole HSA thing. If you have money to invest, doesn't that mean you probably have money to afford decent insurance and don't qualify for an HSA?

 

[otherpsychotichalf]

@kshell If you’re young and healthy, paying extra for “decent” insurance may not be worth as much as the triple tax advantaged savings that you can accumulate in an HSA. If you’re rarely hitting your deductible or out of pocket max on the low deductible plans, for example, using a high deductible plan won’t cost you much more, and the monthly savings on premium can go into the HSA and grow for decades.

 

[jake15]

@otherpsychotichalf

If you’re young and healthy....

Thing is that you never know when that is going to change. 4 years ago I went from enjoying a beautiful spring day to needing the services of a good orthopedic surgeon in less than 10 seconds, and I was not doing anything that was high risk or stupid.

There is a lot lurking out there. Accidents, adult-onset type 1 diabetes, myocarditis, cancer.... the list goes on.

Medical expenses are at the root of 66.5% of bankruptcies. Being adequately insured should be the #1 step in achieving financial security.

 

[otherpsychotichalf]

@jake15 I’m not denying what you’re saying, but if my high deductible health plan has a max out of pocket of $3500 per year, and I can afford $3500 per year in the event that I stop being healthy, then I’m not particularly worried. I would still consider myself “adequately insured.” If you have an emergency fund that is well above your out of pocket max, you can cover those expenses without having to even dip into the HSA. It’s not like a HDHP is equivalent to being uninsured. In fact, there are maximum out of pocket amounts to even qualify for an HSA, ensuring that companies don’t market policies that are essentially no insurance as HSA policies.

 

[jake15]

@otherpsychotichalf I understand your point, but these HSA savings discussions always seem to start with, as you put it, "If you're young and healthy". That is a dangerous mindset.

Perhaps they should start with "if your emergency savings are more than adequate to deal with a serious medical condition considering the insurance coverage that you would have". And it really is not a matter of age.

 

[charlie84]

@jake15 I second this. My problem with an HSA is that it basically revolves around the idea you don't seek health care. Which is a very slippery slope even at a young age. When I had a cancer scare as a 25 yo I was super healthy. It was a false alarm, inflamed lymph node due to a wisdom tooth infection. However, I am glad I did seek medical help immediately through my boring HMO insurance.

Even now, through my 20's I used it for lab-accurate COVID tests, physicals, allergy medication, anti-fungi treatment, dermatologist/acne care.

 

[kickep]

@charlie84 Most HSA plans cover basic check ups and offer discounts on services. The only difference from an HSA and other plans is the high deductible. It's not a difference in having services in an emergency.

 

[evowoman24]

@kshell Half the US is covered by employer insurance. My job dumps $2k into our HSA accounts yearly, which is nice.

 

[mn_of_stl]

@kshell It's not about "good" or "bad" insurance, you just need to have a high-deductible plan to qualify. My insurance is great, but it is a high-deductible plan specifically so that I can have an HSA. My employer pays into my HSA each year and I can use that amount to cover the deductable.

 

[simonwallace]

@kshell If you are young and/or have a high income it actually makes sense to have a high deductible plan. “High deductible” is only like $1,400 or something. And an HSA is worth it because your insurance doesn’t/won’t cover 100% of everything forever.

 

[jamiex]

@kshell Premiums on my family HDHP are something like $40 per month. The Cadillac plans would cost a couple hundred per month.

If I go with the PPO, I’m guaranteed to pay thousands of dollars in premiums, even if I rarely go to the doctor or don’t have prescriptions, or other medical expenses.

If you keep enough cash to cover your maximum out of pocket, it’s a bet against losing your money to insurance premiums. Insurance just needs to cover the extenuating circumstances in my case.

 

[jagger]

@kshell I have “good” insurance. They’ve turned down every claim I’ve submitted - United healthcare. In the US there is no good insurance. HSA gives you more options and less depending on a for profit industry to make decisions in your best interests.