IRAs offer a better choice of investments than 401 (k) plans, which usually have 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). For those looking for an even greater variety of investments, a Physical Gold IRA rollover may be the best option. 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. 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. Most IRAs and 401 (k) don't allow withdrawals before the owner turns 59 and a half years old; otherwise, the Internal Revenue Service (IRS) imposes a tax penalty. Again, the tax-deferral benefit of a business-sponsored plan is a good reason to allocate money to a 401 (k) after you've funded a traditional or Roth IRA. Of course, you'll need to check with the bank, brokerage agency, or financial institution where you keep your IRA to confirm if your expenses qualify to exempt you from the 10% early withdrawal penalty.
While both are great retirement account options, the biggest difference between a 401 (k) and an IRA is that you only contribute to a 401 (k) through your employer. In addition, even if you don't qualify to deduct your contribution to the traditional IRA, you can make non-deductible contributions and still benefit from the growth of tax-deferred investments. While the contribution limits are lower, you can still open an IRA to manage your retirement savings regardless of where you work. When you think about saving for retirement, the two most common accounts that can arise are usually a 401 (k) or an IRA.
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. Both traditional IRAs and 401 (k) grow tax-free, meaning there are no taxes on interest and earnings over the years. If your 401 (k) plan has limited investment options, consider opening a traditional or a Roth IRA and contributing to the annual maximum. 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.
Contributions to a Roth IRA are made with after-tax money, meaning you won't receive a tax deduction in the year of the contribution. After contributing up to the IRA limit, think about funding your 401 (k) to get the pre-tax benefit it offers. Several types of IRAs have specific income and contribution limits, as well as their own tax advantages. An IRA might be better than a 401 (k) if you're looking for more flexibility in your retirement planning.