The 401 (k) is simply objectively better. Both 401 (k) plans and IRAs have valuable tax benefits, and you can contribute to both at the same time. The main difference between 401 (k) and IRAs is that employers offer 401 (k) plans, but people open them (using brokers or banks). IRAs tend to offer more investments; 401 (k) allow for higher annual contributions.
Whether a 401 (k) or IRA is better for a person depends on the person. A 401 (k) plan allows you to contribute more money each year before taxes than an IRA. However, an IRA tends to have more investment options, allowing for greater control and flexibility over the account. Keep in mind that a person can have both.
But despite how positive all of this is, there are good reasons to have an IRA in addition to your 401 (k). An IRA not only gives you the ability to save even more, but it can also give you more investment options than you have in your employer-sponsored plan. And if you have a Roth IRA, there's also a chance to earn tax-free income in the future. The good news is that you don't necessarily have to think about an IRA versus a 401 (k).
You can save with both, as long as you meet the requirements and respect the contribution and income limits. Employers offer their employees the SEP and SIMPLE IRAs and are similar to 401 (k) accounts in many ways, but there are a few differences: their contribution limits are the main of them. Both traditional IRAs and 401 (k) grow tax-free, meaning there are no taxes on interest and earnings over the years. People can choose to save on their own and open an IRA (a person can have both a 401 (k) and an IRA).
However, the process and guidelines described by the IRS must be followed so that the IRA transfer is not counted as a distribution, which could result in a penalty. You'll have access to a wide selection of investments when you open your IRA at a broker, and you'll save yourself the administrative fees charged by some 401 (k) plans. If your employer doesn't offer a plan, an IRA can be a good start to your retirement savings and another chance for your income to increase tax-free. When that's the case, choosing an IRA and contributing to the maximum is generally a better first option.
A Roth IRA is a good option if you don't qualify to deduct traditional IRA contributions or if you don't mind giving up the immediate IRA tax deduction in exchange for increasing your investments without taxes and tax-free withdrawals when you retire. Many 401 (k) have entitlement requirements to make equivalent contributions, but SEP and SIMPLE IRAs are 100% purchased as soon as a contribution is made. Several types of IRAs have specific income and contribution limits, as well as their own tax advantages. Remember that if your income exceeds certain thresholds and you or your spouse invest money in a work plan, your ability to deduct traditional IRA contributions may be reduced or eliminated.
Once you get the balance, consider exhausting your IRA for the year, returning to 401 (k), and resuming contributions there. If your 401 (k) plan has limited investment options, consider opening a traditional or a Roth IRA and contributing to the annual maximum.