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3 Reasons to Save in an IRA Instead of Your Employer's 401(k)

By Maurie Backman - Mar 3, 2021 at 5:49AM

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Just because you have access to a 401(k) through your job doesn't mean it's the best retirement plan for you.

Employer sponsored 401(k) plans have their benefits. For one thing, contributing to them is as easy as can be. All you do is tell your payroll department how much money you want to put in, and those funds are deducted from your paychecks without you having to do a thing. Plus, 401(k)s offer much higher annual contribution limits than IRAs. Currently, you can contribute up to $19,500 a year if you're under the age of 50, or $26,000 if you're 50 or older, whereas IRAs max out at $6,000 for workers under 50 and $7,000 for those 50 and older.

But despite these benefits, 401(k)s aren't perfect, and just because you're offered one doesn't mean you have to sign up. Here are a few reasons why you may want to house your retirement savings in an IRA instead.

Document that says IRA on surface next to calculator, pen, and book with bills on it

Image source: Getty Images.

1. You're not thrilled with your company match

Many employers that sponsor 401(k) also offer a matching program where they'll put in some money for every dollar you contribute. A generous matching program could score you a lot of free cash for retirement, but if your employer's match isn't much to write home about (say, your employer will only match up to 1% of your salary), or there's no match on the table at all, then you may want to look at an IRA instead. Furthermore, if your employer's 401(k) match is subject to a restrictive and lengthy vesting schedule, that's another reason to look at an IRA instead.

2. You want more control over your investments

In 2016, the average large 401(k) plan offered 27 investment options, including a mix of bond, equity, and target date . If your company's plan offers a similar number of choices, you may find it pretty easy to find investments that align with your risk tolerance and goals. But if you're only offered half as many funds to choose from, you may find your employer's plan too limiting -- or too expensive, especially if your plan only has a handful of low-cost index funds and is largely loaded with actively managed mutual funds that come with much higher fees.

Furthermore, one thing 401(k)s don't let you do is invest your retirement savings in individual stocks. IRAs, on the other hand, include that option. If you're a savvy investor and you want the maximum amount of control over your portfolio, then an IRA could be a better choice.

3. You don't want to pay hefty administrative fees

Some 401(k) plans charge expensive administrative fees that are passed onto savers like you. If your employer's plan comes with fees in excess of 1%, that alone is a good reason to look at opening an IRA instead.

A company-sponsored 401(k) can be a great perk, but that doesn't mean you have to participate in one. If there are aspects of your employer's 401(k) you aren't happy with, see if an IRA mitigates them. Granted, if your point of contention is a stingy company match, an IRA won't solve for that. But an IRA could help you address the issues of limited investments choices and expensive fees, so it's worth exploring your options.

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