IRAs offer a better choice of investments. With a 401 (k) plan, you'll only have the options available in that specific plan, and usually no more than a couple of dozen mutual funds. 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. Your 401 (k) plan has limited investment options. In all likelihood, you can choose between mutual funds from a particular provider. However, with an IRA, you can invest almost anywhere.
In addition, you probably have more types of investments to choose from, not just mutual funds, but also individual stocks, bonds, and exchange-traded funds (ETFs), to name a few. 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.
A 401 (k) is a better option than an IRA if you want to invest more for retirement and aren't too picky about investment options. Most plans are limited to the securities (such as stocks and bonds) chosen by the employer. Instead, you must choose between keeping your 401 (k) account as it is with that company, transferring it to an IRA, or transferring it to your new employer's 401 (k) plan. Transferring your money to an IRA will often reduce the administrative and management fees you've been paying, which can affect the return on your investment over time.
Another reason why an IRA might be a better option is if you currently have low tax rates but expect higher tax rates during retirement. This is because withdrawals from a traditional IRA are taxed at ordinary income tax rates at the time of the withdrawal; qualified Roth withdrawals, as I mentioned, are tax-exempt. An IRA might be better than a 401 (k) if you're looking for more flexibility in your retirement planning. While 401 (k) are usually only offered by employers (who usually match employee contributions), individuals can open IRAs through any retail brokerage firm.
Not everyone has the option of saving for retirement through an employer, and that's where an IRA can come in handy. 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. An often overlooked difference between a 401 (k) and an IRA relates to the IRS rules regarding distribution taxes. Eligibility to make tax-deductible contributions to a traditional IRA is phased out for people with high incomes if the high-income person or spouse has access to an employment retirement plan.
Regardless of whether you decide to open an IRA or not, if your employer offers you a Roth 401 (k), you could also consider adding it to your retirement savings strategy. Nor can you make contributions to a 401 (k) after you leave the company, but you can if you transfer it to an IRA. If you do, you usually have just 60 days from the date you received it to transfer it to an IRA. Once you get the balance, consider exhausting your IRA for the year, returning to 401 (k), and resuming contributions there.
Ultimately, by comparing all the differences between IRAs and 401 (k), you may decide that you prefer one over the other, or you can choose both. When you think about saving for retirement, the two most common accounts that can arise are usually a 401 (k) or an IRA. .