The No-Brainer Retirement Account I’d Choose Way Before a 401(k) | The Motley Fool

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The flexibility of IRAs gives people more control and options for tailored retirement planning.

Financial planning and saving for retirement might not be the easiest tasks, but one of the best things you can do to help yourself along the way is to take advantage of available retirement accounts. It’s not often that Uncle Sam and the IRS hand out gifts, but retirement accounts happen to be one occasion.

When it comes to retirement accounts, a 401(k) is the most popular option. Among working-age people (ages 15 to 64), over 34% had a 401(k) or a similar account, according to a 2021 survey by the Census Bureau. Its popularity is even more noteworthy when you consider how many people don’t work jobs that offer a 401(k) in their teens or early 20s.

But despite its popularity, a 401(k) wouldn’t be my go-to retirement account. I’d choose an IRA because of its flexibility.

As an investor, the stocks you choose should be a true reflection of your financial goals, investment strategy, and risk tolerance. Unfortunately, this might not always be possible when dealing with a 401(k) because your plan provider limits you with set investment options to choose from.

Generally, the options for a 401(k) are your company’s stock (if it’s a public company), index funds based on market caps (small cap, mid cap, and large cap), bonds, and target-date funds based on your projected retirement year.

On one end, the limited 401(k) investment options are beneficial for investors who might feel analysis paralysis or be overwhelmed by essentially unlimited choices. On the other end, the options provided can be limiting for investors who want the freedom to craft their portfolio in a way that truly reflects their investing preferences and goals.

One of the beauties of an IRA is that it’s essentially a brokerage account with tax benefits. You can invest in any stock, bond, or exchange-traded fund (ETF) that you could in a regular brokerage account.

Want to invest in Microsoft but you’re not an employee there? With an IRA, that’s no problem. Interested in artificial intelligence and want to invest in an AI-focused ETF? You got it. High interest rates have you looking to add bonds to your portfolio? Consider it done.

Contributions to a retirement account should be made to save it for just that: retirement. That’s their purpose, and that’s how you should approach them. However, I’m sure it goes without saying that sometimes life happens, and emergencies pop up.

With both 401(k)s and IRAs, early withdrawals can trigger a 10% early withdrawal penalty plus taxes owed on the withdrawn amount. The difference with IRAs, though, is their exceptions for the early withdrawal penalty. Here are some exceptions that apply to IRAs but not 401(k)s:

Part of why 401(k) plans are so common is that they’re offered through employers. Many employees don’t even have to actively set up their accounts; they’re enrolled automatically. With this employer connection, though, come a few more complexities you don’t experience with IRAs.

IRAs operate independently and aren’t tied to a job, making it easier on you when you switch jobs or go through periods of unemployment. Switching jobs doesn’t automatically mean you have to go back to the drawing board with your 401(k), but there are cases where the choices can be overwhelming.

Getting a new job can often mean deciding if you want to roll over your 401(k) to your new employer’s plan, leave it where it is (if that’s allowed), roll it into an IRA, or cash it out (which usually results in penalties). With an IRA, you don’t have to worry about this: The IRA stays with you, regardless of your employer.

The flexibility of an IRA lets you navigate retirement saving and investing with more ease.

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