5 Benefits of an IRA Over a 401(k) (2024)

5 Benefits of an IRA Over a 401(k) (1)

Saving for retirement is an important part of financial planning, and choosing the right investment vehicle can make a significant difference in your long-term financial well-being. While employer-sponsored 401(k) plans have become a popular choice for many workers, individual retirement accounts (IRAs) offer several compelling advantages that should not be overlooked. Here are three benefits to consider. If you want more information about picking an IRA over a 401(k) for your retirement, consider talking to a financial advisor.

1. Greater Flexibility With Investments and Withdrawals

IRAs are generally more flexible than 401(k)s because they offer a broader range of investment options and greater control over account management. While 401(k) plans are typically limited to a selection of investment choices curated by the employer, IRAs allow individuals to invest in a wide variety of assets, including stocks, bonds, mutual funds, ETFs and even real estate in some cases.

Additionally, IRAs can have fewer restrictions on withdrawals, permitting penalty-free distributions for qualifying higher education expenses, first-time home purchases and health insurance premiums paid while unemployed, which are not generally allowed in 401(k) plans without incurring penalties. This flexibility makes IRAs a more versatile tool for personalized retirement planning.

2. Save Money on Fees

IRA fees are generally lower than 401(k) fees due to the absence of employer-related administrative costs and the ability to shop around for competitive rates. With IRAs, individuals have the flexibility to choose their financial institution and investment options, which often leads to lower expense ratios and management fees. 401(k)s, comparatively, are managed by third-party administrators chosen by the employer, which can include additional layers of fees such as plan administration fees, investment management fees and record-keeping fees.

On average, IRA annual fees are typically $25 to $75, with additional fees for activities you create. 401(k) fees, on the other hand, can average 2.22% of the total asset amount. This difference in fees can lead to substantial savings over the long term, allowing more of your money to be invested and grow.

3. More Options to Consolidate Retirement Accounts

IRA consolidation options can generally be more straightforward and advantageous when compared with 401(k) plans. With IRAs, you can easily roll over funds from multiple retirement accounts, including 401(k)s, 403(b)s, and other IRAs, into a single IRA account. This consolidation simplifies account management, reduces paperwork and can lower overall fees by concentrating investments in fewer accounts.

401(k)s, on the other hand, typically do not offer the same level of flexibility for consolidation. While it’s possible to roll over funds from a previous 401(k) into a new employer’s 401(k), the process is subject to the new plan’s rules and limited investment options. Moreover, maintaining multiple 401(k) accounts across different employers can lead to higher cumulative fees and fragmented retirement planning.

Can You Contribute to Both an IRA and a 401(k)?

Contributing to both an IRA and a 401(k) can help maximize your retirement savings and provide a blend of benefits that enhances your financial security. A 401(k), which can include employer matching contributions, allows for higher annual contribution limits. In 2024, you can contribute $23,000 to your 401(k), and an additional $7,500 if you are age 50 or older.

By adding an IRA to your retirement plan, you will be able to contribute $7,000 in 2024 (and another $1,000 if you’re at least 50). While the contribution limit is lower than a 401(k), you will have more investment opportunities. Additionally, with a Roth IRA, you do not have to make required minimum distributions (RMDs) after age 73, and you could also make tax-free withdrawals as long as they meet the requirements.

By using both types of accounts, you can create a more comprehensive and diversified retirement savings approach. For example, you may want to contribute to a 401(k) up to your company match amount so that you can earn that money and then max out your IRA in order to control specific investments. Others might want to max out their IRA first and then invest as much as they can back into a 401(k) if they aren’t offered a company match.

Bottom Line

5 Benefits of an IRA Over a 401(k) (3)

An IRA can offer greater investment flexibility and lower potential fees when compared with a 401(k). This could allow retirement savers to choose from a wider range of investment options and minimize costs. Additionally, IRAs provide the option for Roth accounts, which can allow tax-free withdrawals in retirement. Investing in both, however, could allow you to maximize your retirement savings even further by leveraging the higher contribution limit and employer match from a 401(k), while benefiting from the more investment flexibility and tax advantages of an IRA.

Saving for Retirement Tips

  • A financial advisor is an important part of the puzzle when thinking through what type of retirement account you should use and how much you should save. They can help you align all of your finances with your long-term financial goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you canhave a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • You can also use an investment calculator to help you see how your portfolio might grow over time.

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5 Benefits of an IRA Over a 401(k) (2024)
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