Recent data from the U.S. Census shows that among working-age Americans aged 15 to 64, the most common type of retirement account in 2020 (the most recent year for which this data was collected) was none other than a 401(k) plan. That year, roughly 35% of workers had a 401(k).
Similarly, your employer might offer you access to a 401(k) plan. And if there's a company match available, it pays to put in enough money to snag it in full.
If, for example, your employer will match up to $3,000 in worker contributions, you'll want to stick $3,000 into your 401(k). If you don't, you'll effectively be saying no to free money for your retirement.
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But once you've hit your matching limit, you may want to save for retirement in an IRA instead of a 401(k). And the same might hold true if you have access to a 401(k) plan but there's no employer match at all. Here's why.
1. You might save on fees
One big drawback of saving for retirement in a 401(k) is facing a host of fees. Those fees could range from the administrative costs of managing your plan that are passed on to you to fees you'll pay for the specific investments you choose.
You'll need to look at different IRAs to see what fees you'll be on the hook for. But you may end up paying lower fees with an IRA all in. And the less money you lose to fees, the less your balance erodes.
2. You might get access to more investment options
Some people don't want to take a hands-on approach to investing their retirement funds. In that case, a 401(k) plan might work great for you, since these plans generally offer easy options, like target date funds, which take all of the guesswork out of investing.
But if you're someone who prefers to assemble a customized portfolio, an IRA is generally a better bet. IRAs allow you to invest your retirement savings in individual stocks, while 401(k)s generally do not. Being able to control your investments could lead to more wealth over time.
3. You may be less likely to forget about an IRA
It used to be that people would graduate college and potentially work for the same company for 20, 30, or 40 years. These days, short stints at companies are far more common and acceptable. But that increases the risk of accidentally forgetting about a 401(k) after leaving a job and potentially forgoing that money.
Capitalize estimates that more than 29 million 401(k)s have been abandoned by savers, totaling roughly $1.65 in unclaimed assets. That's huge. Because an IRA isn't tethered to your job, you may be less likely to forget about it over time.
You may find that saving in a 401(k) is conducive to meeting your goals. But it pays to consider the benefits of housing at least some of your retirement savings in an IRA, especially when you're talking about money that isn't eligible for any sort of employer match.
