A key component to a sound financial house is ensuring you have access to cash in times of need. And while focusing on retirement savings, and taking advantage of an employer plan like a 401(k) is great, failing to build savings and liquidity elsewhere may prove problematic later down the road.

401(k)s and other employer-based retirement plans provide substantial incentives and tax benefits, but accessing them before retirement can prove difficult, especially if you need money quickly.  For example, if you’re under 59 ½ and still employed, you typically may only access your 401(k) by taking a loan (if your plan allows), or if you meet the restrictive requirements, a hardship withdrawal. Either option comes with consequences.

Therefore, having an alternate source of savings outside of a 401(k) is important, and may help keep you out of financial trouble, or at least, from having to pay taxes and penalties if you need access to cash before you retire.

Of course, a cash reserves fund, ranging from 3 to 12 months of living expenses, is prudent and will certainly help in a pinch. But in addition to your 401(k) and a cash reserves fund, I also like the idea of contributing to a Roth IRA to create an alternate source of retirement savings and liquidity.

Contributions to a Roth IRA are made with after-tax money, but all future growth and earnings will be tax-free when you take qualified distributions. In addition to the tax benefits, another great advantage of the Roth IRA is its flexibility – specifically, the ability to withdraw your contributions tax and penalty free at any point. You don’t have to wait 5 years or until you’re 59 ½, and it doesn’t matter if you’re working or not.

You may contribute considerable sums of money to a 401(k) each year, and for many, the contribution limits exceed savings ability. For example, in 2017, the 401(k) contribution limit is $18,000 ($24,000 if you’re age 50 or older). If you have the financial ability to max out your 401(k) and contribute to a Roth IRA, don’t pass up the opportunity.

If you don’t, however, consider splitting your annual retirement contributions between your 401(k) and a Roth IRA. In doing so, you will be taking advantage of any employer match, but you’ll also be creating a resource you can access quickly should the need arise.

When splitting your contributions between your 401(k) and a Roth IRA, you’ll want to make sure you’re maximizing any employer match. For example, a common employer match is 100 percent of the first 3 percent of pay contributed, and 50 percent on the next 2 percent of pay contributed.

In this case, if you contribute 3 percent of your pay, you will receive an employer matching contribution equal to 3 percent of your pay; if you contribute 4% of your pay, you’ll receive a 3.5% match; and if you contribute 5 percent of your pay, you’ll receive a 4 percent match.

Any contributions above 5 percent of pay won’t be matched – this is where splitting your contributions comes into play. Participants contributing more than 5 percent of pay may consider redirecting contributions over 5 percent to a Roth IRA instead.  For example, someone contributing 10% of pay would keep 5 percent going to his or her 401(k), but redirect the remaining 5 percent into a Roth IRA.

Like a 401(k), contribution limits apply to a Roth IRA as well. In 2017, the contribution limits for a Roth IRA are $5,500, or $6,500 if you’re age 50 or older. Unlike the 401(k), however, you’ll only be eligible to contribute to a Roth IRA if your income is below certain limits. In 2017,  you’ll be able to make a full Roth IRA contribution if you’re a Single tax filer with Adjusted Gross Income (AGI) below $118,000, or below $186,000 if you’re married and file joint.

Your circumstances are unique. Consider the many features and benefits of a Roth IRA and whether or not your financial house will benefit from one.

Securities and Advisory Services offered through The Strategic Financial Alliance, Inc. (SFA) – Member FINRA, SIPC
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary.  The SFA does not provide tax or legal advice. We cannot guarantee future financial results.