When people think about retirement savings, the 401(k) plan seems to be the first thing that pops into their heads. For decades, it has been the go-to retirement account, used by millions to help secure their financial future. The 401(k) is a cornerstone of retirement planning -- it's tax-friendly, hands-off, and convenient.

Despite how revered the 401(k) seems to be, crowning it the ultimate one-stop shop retirement account might be a stretch. Some notable drawbacks highlight the importance of a diversified retirement savings strategy. That's why an IRA can be a great way to round out your savings.

Cash in a bird's nest.

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The two main types of IRAs

Most people will be choosing between a traditional or Roth IRA. Contributions to a traditional IRA may be deductible, and earnings grow tax-deferred until you take withdrawals in retirement. That's similar to a 401(k), except whether your contributions are deductible depends on your income, your filing status, and whether you or your spouse have a retirement plan at work.

Contributions to a Roth IRA are made with after-tax money, and withdrawals are tax-free in retirement. This allows your contributions and earnings to grow and compound without a tax burden waiting for you when you hit retirement.

Choosing between the two can broadly come down to when you want to pay taxes. People in their peak earning years tend to go with the traditional IRA to get a tax break now, and then pay taxes in retirement when their rate may be lower. People who expect their tax bracket to be higher in retirement tend to go with the Roth IRA to pay taxes now and avoid taxes later at a higher rate.

IRAs allow you to tailor your portfolio better to fit your needs

Financial flexibility shouldn't be taken for granted when saving and investing for retirement. Every person's situation will be different, depending on personal and financial goals, risk tolerance, investment preferences, and time horizon. This naturally means that different investments will work best for different people. Unfortunately, you may not always get to tailor your investments in a 401(k) exactly how you'd like because the investment choices are provided for you.

You'll typically get to choose between market cap-based funds (large, mid, or small), your company's stock (if it's a public company), a handful of bond options, and target-date funds assembled based on your projected retirement year. For many people, those options are good enough; for others, not so much.

In an IRA, your investment options would essentially be the same as a regular brokerage account with a few exceptions like financial derivatives. Just like you could go on your brokerage platform and buy Bank of America stock, dividend-focused exchange-traded funds, or mutual funds, you can do the same in your IRA.

IRA flexibility extends past just investment options

How many times have things been going smoothly, and then ... life happens? Your car may break down. Your job situation could change. Your roof could need replacing. Those are just a few examples of unfortunate circumstances you may have to face at some point, usually without warning. And although you shouldn't rely on your retirement funds for such emergencies, sometimes withdrawing from a retirement account is the only option.

Generally, an early withdrawal from a retirement account will result in a 10% early withdrawal penalty and taxes owed on the withdrawn amount. Those could easily wipe out a nice chunk of your withdrawal. There are some exceptions to this rule for all retirement accounts, but they're limited in a 401(k) compared to an IRA.

Both 401(k)s and IRAs allow early withdrawals for disability and certain medical expenses, but here are some that only apply to IRAs:

  • Education: Withdrawals can be used for qualified education expenses, like tuition and books.
  • First-time homebuyer: Up to $10,000 can be withdrawn to purchase a first home.
  • Insurance premium: If you're unemployed, you can withdraw to pay for health insurance premiums.

You never want to plan to make early withdrawals from a retirement account, but if you're forced to, it's better to have additional options available for those unexpected or major life events.

There's no single approach that's best for everyone

The 401(k) remains a great retirement savings resource, but a diversified approach -- including IRAs -- can offer greater flexibility and adaptability to individual needs. Whether it's planning for life's unexpected turns or optimizing tax benefits, combining the strengths of both 401(k)s and IRAs can lead to a more secure financial future.

Remember: The key to effective retirement planning is finding the right balance for your situation.