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

Most people spend their lives working towards retirement, their ultimate financial destination. There are many ways to get there, but the path you take ultimately depends on your preferences and personal finances. A fork in the road is choosing how to invest your savings.

Two common options are the individual retirement account (IRA) and the employer-sponsored 401(k). The decision is not always easy. For example, a Roth IRA offers exceptional tax benefits, making it an outstanding retirement planning tool. But between a traditional IRA and a 401(k) plan, I absolutely prefer the latter. Here’s why.

Meet Your Competitors: 401(k)s and Traditional IRAs

Not already a pensions expert? Don’t worry. Here are the basics of 401(k) plans and traditional IRAs.

Retirement pensions have become increasingly rare in modern businesses, placing more responsibility on individuals for retirement planning. Many employers have ditched pensions in favor of the 401(k) plan. Workers can invest money from their paychecks for retirement using a 401(k). It also comes with immediate tax benefits. For example, taxes on 401(k) contributions are deferred until retirement, meaning you can lower your taxable income during your working years by contributing more to your 401(k).

However, not all companies offer a 401(k) plan. Meanwhile, IRAs are more widely available because anyone can open one, even if you have a 401(k). That’s right, this isn’t an either-or choice. Traditional IRAs defer taxes on contributions, similar to 401(k) plans. You also get a little more flexibility with IRAs. Most 401(k) plans limit investment options to mutual funds and exchange-traded funds (ETFs), but you can hold individual stocks and other assets in an IRA.

Remember that these are the basics and that there are different variations of 401(k) plans and IRAs. If you have any questions about the rules or the tax implications of each, don’t hesitate to contact a financial advisor.

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Now, IRAs sound pretty good, and of course having that extra control could appeal to many investors. So why do I still prefer the 401(k)?

1. 401(k) plans have higher contribution limits

Investing is all about the numbers. Your retirement nest egg will depend on:

1. How much do you invest?
2. How early do you start?
3. Return on your investments.

As great a tool as IRAs are, they can have somewhat restrictive contribution limits. For 2024, the annual contribution limit for traditional IRAs is $7,000. Exceed this and you’ll face severe tax penalties while the money is in the IRA. You can contribute an extra $1,000 a year starting at age 50, but it certainly puts a cap on your long-term investment potential, especially for higher earners or super savers.

Meanwhile, employees can contribute up to $23,000 to their 401(k) plan in 2024, and those over 50 can add $7,500 in catch-up contributions. It’s much easier to build life-changing wealth in a 401(k) than an IRA, and it’s not close.

2. Many 401(k) plans offer the chance to get free money

If that weren’t enough, some 401(k) plans offer an employer match to incentivize employees to participate. This is generally an amount added to a 401(k) in addition to one’s contributions based on a specified percentage. For example, let’s say your 401(k) plan matches dollar-for-dollar up to 3% of your salary.

That would mean if you earn $100,000 and contribute 3% of that ($3,000), your employer would invest an extra $3,000. It’s as close to free money as you’ll find in the real world, and that can make a huge difference over decades of earnings and savings. Plus, a match doesn’t affect your individual contribution limit! The government will allow up to $69,000 total contributions in 2024 and $76,500 for those 50 or older.

3. 401(k) plans help you keep it simple for your own good

In my opinion, the option to hold stocks and other assets in an IRA doesn’t make much of a difference in how much you can invest through a 401(k). But if the flexibility of the IRA still appeals to you, consider it.

A 401(k) generally restricts investment options, which could actually benefit most people. Unfortunately, most people do not have the knowledge and time to invest most of their wealth in individual companies. Most people would be better off investing their savings in diversified, maintenance-free funds. You can set it and forget it.

That way, you don’t have to worry about inexperience or bad decision-making torpedoing your nest egg as you approach your golden years.

Do you want to open a brokerage account and take some risks? Want to have fun with speculative stocks? Fine. Just don’t do it with your savings. That’s not to say those with IRAs would necessarily do it this way, but using a 401(k) means you won’t even have the opportunity to make such a costly mistake in the first place.