Why Would You Choose an IRA Over a 401(k) for Your Retirement Savings? (2024)

Employer-sponsored retirement plans like 401(k)s can be a pretty sweet deal. Your contributions are made automatically from your paychecks, meaning you don't have to remember to make them on your own. The contribution limit is quite high -- for 2024, you can put $23,000 into one (and an additional $7,500 in catch-up contributions if you're 50 or over).

And best of all, many employers offer matching contributions to a certain point -- perhaps 3%, for example. So if you put 3% of your salary in, your employer will put another 3% in, resulting in 6% of your annual salary in total retirement account contributions for you.

With all these great perks available with 401(k)s, why would anyone ever opt for an IRA instead (or in addition)? Let's explore the benefits of IRAs and see how they can be better than a 401(k) in some respects.

Not everyone has access to a 401(k)

As great as employer-sponsored retirement plans are, not every American worker can participate in one. I worked for a series of tiny nonprofits in my old career, and wasn't offered retirement plan access in most of those jobs (and didn't make enough money to spare any of my paycheck to contribute anyway, but that's a different story).

If you're self-employed, you don't have an employer to administer a 401(k) or match your contributions either. So for people without the option to sign on for a 401(k), an IRA with a brokerage firm is your chance to save for retirement in a tax-advantaged manner. And you even get special IRA options.

You can pick your own IRA broker -- and save money

So many brokerage firms offer IRAs -- you get your choice, since you open the account yourself (rather than having an employer do it for you). And since different brokers offer different fee structures, perks, and access to other financial account options you might want, it's worth taking the time to pick the right one for you.

Since you get to pick your own broker, you can target those with lower investment fees. Unfortunately, you're likely to pay more fees with a 401(k), since you'll owe money for administrative costs, and some investment types (like actively managed funds) also have fees. Fees eat into your retirement cash, so getting to avoid more of them is a compelling reason to consider an IRA.

You can save on taxes now -- or later

IRAs come in two major flavors: traditional and Roth. Traditional accounts offer a tax break in the year you contribute to them, since the money lowers your taxable income -- if you earn $60,000 this year and contribute $6,000 to a traditional IRA, your taxable income will be $54,000 for this year. Consequently, your $6,000 in contributions will eventually be taxed when you make withdrawals in retirement, at whatever your tax bracket is by then.

But if your income is under a certain limit (for single tax filers in 2024, it's $146,000), you might consider a Roth IRA. The contribution limits across traditional and Roth IRAs are the same ($7,000 if you're under 50, and an additional $1,000 if you're 50 or over), but Roth IRAs are funded with post-tax dollars. In exchange for giving up a tax break now, you'll get one in retirement -- your money grows tax free in a Roth IRA. If you expect to be in a higher tax bracket at that point in your life, a Roth IRA can be a good idea.

IRAs offer a greater variety of investments

401(k) plans aren't known for offering a lot of different investment choices. You can't buy individual stocks through a 401(k), nor can you invest in newer and perhaps more exciting assets like cryptocurrency. Target-date funds are a common option; these are pegged to a projected retirement year and the assets in them shift over time to become less risky as the year approaches.

But IRAs offer a whole rainbow of investment options -- stocks, bonds, ETFs, crypto, and beyond. It all depends on what the brokerage offers, so be sure to check that out when you're exploring your IRA options.

Ultimately, if you've got the option to save for retirement with an employer-sponsored 401(k) plan, it's worth considering because of the higher contribution limit. And if you are eligible for an employer match to some of the money you put in, don't miss that -- it's basically free money. In this case, you might consider contributing enough to get that match, and perhaps opening an IRA alongside it so you get more freedom with your investments.

It's your retirement, so save and invest for it in the way that makes the most sense for you.

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Why Would You Choose an IRA Over a 401(k) for Your Retirement Savings? (2024)


Why Would You Choose an IRA Over a 401(k) for Your Retirement Savings? ›

IRAs offer more control, flexibility, and potentially lower fees. If you want to save and invest for retirement, it's wise to take advantage of accounts that offer tax benefits.

Why choose IRA over 401k? ›

For most people, rolling over a 401(k) (or a 403(b) for those in the public or nonprofit sector) to an IRA is the best choice. That's because a rollover to an IRA offers: More control over your portfolio and more personalized investment choices.

Why would you roll over 401k to IRA? ›

If you're transitioning to a new job or heading into retirement, rolling over your 401(k) to a Roth IRA can help you continue to save for retirement while letting any earnings grow tax-free. You can roll Roth 401(k) contributions and earnings directly into a Roth IRA tax-free.

Why is IRA good for retirement? ›

Traditional IRAs offer the key advantage of tax-deferred growth, meaning you won't pay taxes on your untaxed earning or contributions until you're required to start taking minimum distributions at age 73. With traditional IRAs, you're investing more upfront than you would with a typical brokerage account.

Why contribute to IRA before 401k? ›

It usually makes sense to contribute enough to your 401(k) account to get the maximum matching contribution from your employer. But adding an IRA to your retirement mix after that can provide you with more investment options and possibly lower fees than your 401(k) charges.

Is IRA better than 401k for retirement? ›

Individuals can save for retirement through 401(k) plans and individual retirement accounts (IRAs). A 401(k) is an employer-sponsored retirement plan. An IRA is an individual retirement account that individuals open through a bank or a brokerage firm.

What is better for retirement, 401k or IRA? ›

401(k)s offer higher contribution limits.

The employer-sponsored plan allows you to add much more to your retirement savings than an IRA – $22,500 compared to $6,500 in 2023. Plus, if you're over age 50 you get a larger catch-up contribution maximum with the 401(k) – $7,500 compared to $1,000 in the IRA.

When to move money from 401k to IRA? ›

A lot of people only think about rolling over their 401(k) savings into an IRA when they change jobs. For many people, that is an ideal time to shift funds because they can consolidate several retirement accounts from previous employers in one place and potentially take advantage of more investment options.

Should I move my 401k to IRA after retirement? ›

Generally, from a tax perspective, it is more favorable for participants to roll over their retirement plan assets to an IRA or new employer-sponsored plan rather than take a lump-sum distribution.

What are the disadvantages of IRA rollover? ›

Disadvantages of an IRA rollover
  • Creditor protection risks. You may have credit and bankruptcy protections by leaving funds in a 401k as protection from creditors vary by state under IRA rules.
  • Loan options are not available. ...
  • Minimum distribution requirements. ...
  • More fees. ...
  • Tax rules on withdrawals.

Why would you want an IRA? ›

An Individual Retirement Account (IRA) is a self-funded and self-managed savings or investment account that can help you to accumulate more wealth for your retirement than you might with a traditional savings or investment account. IRAs offer numerous tax advantages, including tax-deferred or income tax-free growth.

What are the disadvantages of a traditional IRA? ›

  • You'll pay taxes down the road: You may have enjoyed the tax benefits at a younger age, but that perk doesn't last forever. ...
  • You're required to withdraw the money: You might not be sure of what you'll be doing at age 73, but one thing is for certain with a traditional IRA: You'll have to start taking some money out.
Apr 16, 2024

Should I open an IRA if I have a 401k? ›

While a 401(k) or other employer-sponsored retirement plan can be considered the backbone of your retirement savings, there's a good case for having an IRA as well. An IRA—either a traditional or Roth—often offers greater investment choice and flexibility.

Can I contribute full $6,000 to IRA if I have a 401k? ›

If you participate in an employer's retirement plan, such as a 401(k), and your adjusted gross income (AGI) is equal to or less than the number in the first column for your tax filing status, you are able to make and deduct a traditional IRA contribution up to the maximum of $7,000, or $8,000 if you're 50 or older, in ...

When should I not contribute to IRA? ›

For 2020 and later, there is no age limit on making regular contributions to traditional or Roth IRAs. For 2019, if you're 70 ½ or older, you can't make a regular contribution to a traditional IRA.

Why would someone want a traditional IRA? ›

Conversely, if you think you'll be in a lower tax bracket when you retire, a traditional IRA can be an attractive choice; you get the tax benefits when you're in a relatively high tax bracket and can make your withdrawals when you're potentially in a lower bracket.


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