Why choose an IRA over a 401(k) for retirement savings?

Employer-sponsored retirement plans like 401(k)s can be a pretty good deal. Your contribution is automatically taken out of your paycheck, so you don’t have to contribute directly. Contribution limits are quite high. In 2024, you can put in $23,000 in one go (and if you’re over 50, you can add an additional $7,500 in supplemental contributions).

And best of all, many employers offer matching contributions for a certain number of points (e.g. 3%). So if you put in 3% of your salary, your employer will put in an additional 3%, resulting in your total retirement account contribution being 6% of your salary.

With all these great benefits offered by a 401(k), why would you choose an IRA over (or in addition to) an IRA? Let’s take a look at the benefits of an IRA and see in what ways it is better than a 401(k).

Not everyone has access to a 401(k).

Employer-sponsored retirement plans are great, but not all American workers can participate in them. In my previous jobs, I worked for a series of small non-profits, but most of my jobs did not provide me with access to a retirement plan. (And I didn’t make enough money to save my salary to contribute anyway, but that’s another story.) .

If you are self-employed, you do not have an employer to manage your 401(k) or match your contributions. So for people who don’t have the option of signing up for a 401(k), a brokerage firm’s IRA is a tax-advantaged way to save for retirement. And special IRA options are also available.

You can choose your own IRA broker and save money.

Many brokerage firms offer IRAs. You have the option to open the account yourself instead of having your employer open the account for you. And since different brokers offer access to different fee structures, perks, and other financial account options you may want, it’s worth taking the time to choose the one that’s right for you.

Being able to choose your own broker allows you to target people with low investment fees. Unfortunately, with a 401(k), you’ll likely pay more in fees because you’ll have to pay management fees and some investment types (like actively managed funds) also have fees. Fees eat into your retirement savings, so avoiding more of these fees is a compelling reason to consider an IRA.

You can save on taxes now or later.

IRAs come in two main forms: Traditional and Roth. Traditional accounts offer tax breaks in the years you contribute. That’s because that money lowers your taxable income. If you earn $60,000 this year and contribute $6,000 to a traditional IRA, your taxable income this year would be $54,000. As a result, when you withdraw money in retirement, your $6,000 contribution will eventually be taxed, regardless of your tax bracket until then.

However, if your income is below a certain limit ($146,000 for single tax filers in 2024), you may want to consider a Roth IRA. Contribution limits for traditional and Roth IRAs are the same ($7,000 if you’re under 50 and an additional $1,000 if you’re 50 or older), but Roth IRAs are funded with after-tax dollars. In exchange for giving up tax benefits now, you receive benefits in retirement. With a Roth IRA, your money grows tax-free. If you expect to be in a higher tax bracket at that point in your life, a Roth IRA may be a good idea.

IRAs offer a greater variety of investments.

401(k) plans aren’t known for offering a wide variety of investment options. You can’t buy individual stocks through your 401(k), and you can’t invest in newer, more exciting assets like cryptocurrencies. Target date funds are a common option. This is fixed to your expected retirement year, and the assets within it can move over time, reducing your risk as the years approach.

However, IRAs offer a variety of investment options, including stocks, bonds, ETFs, and cryptocurrencies. It all depends on what services your brokerage offers, so be sure to check those out as you explore your IRA options.

Ultimately, if you have the option to save for retirement through an employer-sponsored 401(k) plan, it may be worth considering because it has higher contribution limits. And if you qualify for an employer match on some of the money you invest, don’t miss it. It’s basically free. In this case, you may want to consider contributing enough to get that match and opening an IRA along with it to give yourself more freedom to invest.

It’s your retirement, so save and invest in the way that works best for you.

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