3 Signs an IRA Is a Better Choice Than Your Company’s 401(k)

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Just because you’re offered a 401(k) plan doesn’t mean you have to save in one. Read on to see if there’s a better choice for you. 

One benefit of being a salaried employee is getting access to perks like subsidized health insurance, paid time off, and, in many cases, a 401(k). And you may find that saving in your company’s 401(k) plan is a convenient way to build up a retirement nest egg.

That’s because 401(k)s are funded via payroll deductions. You simply tell your employer how much you want to contribute toward your retirement savings, and that amount will be deducted from your paychecks before they hit your bank account.

Another benefit of 401(k)s is that they come with generous contribution limits. This year, you can put up to $22,500 into a 401(k) if you’re under the age of 50, and up to $30,000 if you’re 50 or older. By contrast, IRAs max out at $6,500 for savers under 50 and $7,500 for those 50 and over.

But while many people like the idea of saving in an employer-sponsored 401(k), you may want to opt for an IRA even if a 401(k) plan is available to you. Here are some reasons an IRA could be a better choice.

1. Your 401(k) plan comes with limited investment options

It’s common for 401(k)s to limit savers to a few dozen funds. And you might struggle to find funds that meet your investment goals or align with your objectives.

Also, investing in these funds could mean being charged high fees for the privilege of doing so. If you put your 401(k) into mutual funds, the fees you’re charged to do so could seriously eat away at your returns.

The nice thing about IRAs is that they generally allow you to invest in individual stocks, whereas 401(k)s don’t. That not only gives you more options and more opportunities to diversify your portfolio, but it could help you limit your investment fees substantially.

2. Your 401(k) plan charges hefty administrative fees

It’s not just investment fees that 401(k)s tend to come with. Many also impose high administrative fees to keep your plan running. Those fees have the potential to be lower for IRAs, so if you’re being charged a lot, it pays to see what administrative fees you’re looking at with an IRA instead.

3. Your company doesn’t offer any sort of 401(k) match

It’s common for companies that offer 401(k) plans to match worker contributions to some degree. A company, for example, might match contributions in full up to a certain amount — say, $3,000.

But if your employer doesn’t offer any sort of match, then there may not be much of a benefit to saving for retirement in your company’s 401(k). There are no matching incentives to be had with an IRA, but at least there, you get more investment choices and are generally looking at lower fees.

Saving for retirement in a 401(k) plan is a seamless way to build a nest egg. But even though falling back on your employer’s 401(k) might seem like the easiest option, it’s not necessarily the most cost-effective. And if any of these signs apply to you, you may be much better off building your nest egg with an IRA.

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