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8 Reasons a Roth IRA May Be Better Than Your Company 401(k)

Author: Maurie Backman | July 25, 2021

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Choose the right home for your savings

The benefit of saving for retirement in a company 401(k) is getting to capitalize on an employer match. Many companies that sponsor 401(k) plans also match workers' contributions to varying degrees. But even if you have access to a 401(k), it could still pay to house your long-term savings in a Roth IRA. Here's why.

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1. You get more investment choices

With a 401(k), you can't buy individual stocks. Rather, you're limited to a selection of funds, and that selection may not be all that robust. With a Roth IRA, you can invest in funds or individual stocks, and you get a lot more choices to work with.

ALSO READ: Peter Thiel's $5 Billion Roth IRA Secret Could Make You Rich

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2. You can grow your investments tax-free

When you invest your 401(k) dollars, that money gets to grow on a tax-deferred basis, but you'll eventually pay taxes on gains in your account. With a Roth IRA, those gains are yours to enjoy tax-free.

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3. You'll avoid taxes during retirement

Roth IRAs don't give you an immediate tax break on the money you put in, but once you start taking withdrawals in retirement, that money is yours to collect without paying the IRS a dime. That gives you more financial freedom later in life.

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4. You can get out of taking RMDs

Roth IRAs are the only tax-advantaged savings plan to not impose required minimum distributions, or RMDs. These force you to remove a chunk of your savings each year, at which point you lose the option to keep that money invested in a tax-advantaged fashion, so the fact that Roth IRAs don't have them is a definite plus.

ALSO READ: 3 Incredible Roth IRA Tax Benefits

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5. You can leave more money behind to your heirs

Because Roth IRAs don't come with RMDs, they allow you to leave a substantial amount of wealth to your heirs. If that's something you want to do, then it pays to favor a Roth IRA over any other retirement plan.

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6. You get more flexibility with your money

Because you don't get a tax break on your Roth IRA contributions, you get the option to withdraw your money at any time without penalty. That means if you run into an emergency situation, you can tap your Roth IRA to cover it. That said, this allowance applies to the principal amount you contribute to your account. If you access the gains portion early, penalties could apply.

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7. You can avoid hefty fees

When you save in a 401(k), you'll often be subject to costly administrative fees that eat away at your returns (and that's not even counting the investment fees you might end up paying). Roth IRAs tend to charge lower fees that won't erode your savings.

ALSO READ: 4 Benefits of Opening a Roth IRA for Your Kids

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8. You can keep more of your Social Security benefits

Social Security income can be taxable once your total earnings exceed a certain threshold in retirement. Roth IRA withdrawals, however, don’t count toward that threshold, so if you keep your money in a Roth IRA, it may help you avoid taxes on your benefits.

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Is a Roth IRA right for you?

There are plenty of good reasons to save in a company 401(k). In addition to snagging matching dollars, you can also benefit from a higher annual contribution limit. But even so, Roth IRAs come with a host of perks, and you may find that opening one is the best move for you. It pays to explore your options so you can save for retirement as efficiently as possible.

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