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

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.