I absolutely prefer an IRA to a 401k for retirement savings. Here’s why.

As a Certified Financial Planner®, one of the most common questions I get is how I save for my own retirement. I won’t go into the actual stocks and funds I own in this article, but I will say that my preferred retirement savings vehicle is an Individual Retirement Account (IRA) as opposed to a 401(k). Here’s why.

Why I prefer an IRA to a 401(k)

Without a doubt, the main reason I prefer an IRA over a 401(k) as a retirement savings vehicle is investment flexibility. When you enroll in an employer’s 401(k) plan, you’re generally given a “menu” of investment funds to choose from — usually a few dozen at most.

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While some 401(k) plans offer great index funds and mutual funds, my IRA allows me to invest in almost any stock, bond, exchange-traded fund (ETF), or mutual fund I want. They can buy certificates of deposit (CDs) to take advantage of high interest rates. They can even use some options strategies to generate income.

Of course, not all of these are suitable for all investors. For example, it’s best to avoid options unless you really know what you’re doing. The point is that you have much more freedom to design the retirement portfolio you want.

And if you not Whether you want to choose your own investments with some or all of your money, it’s worth noting that many brokers allow IRA investors to sign up for a robo-advisor or automated investment service. So you could put most from your retirement savings on autopilot, like with a 401(k), but also leave some that you can invest in whatever companies or funds you want.

Other IRA advantages

There are several other benefits of IRA investing that are worth noting. Withdrawal flexibility is great.

As with a 401(k), you generally have to leave your IRA investments alone until you reach age 59 1/2 or face an early withdrawal penalty. But there are some big exceptions that only apply to IRAs:

• You can withdraw up to $10,000 at any time to use toward your first time purchase, either for yourself or someone else.
• You can use any amount in your IRA funds to pay for eligible higher education expenses. In fact, it’s a popular strategy to use a Roth IRA to save money for college in some cases.

Now, unless your money is in a Roth IRA, it will still be considered taxable income when withdrawn, regardless of your age. But these two early withdrawal exceptions can be very valuable to some people.

Disadvantages of an IRA

To be fair, there are some downsides to using an IRA instead of a 401(k). First, you can borrow from a 401(k) if you need to and then pay yourself back (with interest). There are also some exceptions that allow you to withdraw from your 401(k) before your standard retirement age if you leave your job or retire early.

Most employers also offer a 401(k) match, so if you’re eligible, it’s important to take full advantage of this with your 401(k) contributions. Then, and only then, might it make sense to put money into an IRA. In many cases, you can contribute and get the tax benefits of both.

The standard IRA contribution limit is as well much lower than the 401(k) limit, so it might not be best if you’re a super saver in retirement. For 2024, the IRA contribution limit is $7,000 for those under 50, while the 401(k) deferral limit is $23,000 for this age group. However, if you are self-employed, there are two special versions of IRAs, the SIMPLE IRA and the SEP-IRA (I use the latter), which have significantly higher contribution limits. (Note: There’s also a solo 401(k) for the self-employed.)

As a final thought, a key takeaway is that there is no perfect retirement account for everyone. For the reasons discussed here, my SEP-IRA does the best job of meeting my needs, but your ideal retirement account might be different.