A 401(k) Seems Like the Superior Retirement Account -- Until You Realize You Can Do These With an IRA

There are plenty of things to like about 401(k) accounts, including their hands-off nature, company matches, and the ability to lower your taxable income. For many Americans, they're synonymous with saving for retirement, which makes sense because it's by far the most widely used retirement account type in the Unites States.

A 401(k) is great, and rightfully the main retirement account people use, but an individual retirement account (IRA) is an underrated option that can supercharge your retirement savings and offer a bit more flexibility than your 401(k) does.

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More investment freedom

When you first start a job and open a 401(k), you'll need to decide how you want your money invested. Typically, your plan administrator provides you with options to choose from. This may be ideal for someone who prefers a more hands-off approach. However, if you want more control over where your funds go, this could be limiting.

Suppose you saw the artificial intelligence boom coming years ago and wanted to add Nvidia to your portfolio. Unless you worked for the company, you likely wouldn't be able to invest in it in your 401(k). Or suppose you've been a big tech believer and want to invest in the Vanguard Information Technology ETF. There's a good chance you can't in your 401(k).

This isn't the case with an IRA. You can invest in essentially any stock or exchange-traded fund (ETF) you can invest in with a standard brokerage account. This gives you the freedom to invest in individual stocks, niche ETFs you may be interested in, or whatever stocks you feel truly fit your goals, risk tolerance, and time horizon.

More early-withdrawal freedom

Typically, when you withdraw from a retirement account before the set age, you'll face a 10% early withdrawal penalty.

Both 401(k)s and IRAs allow you to make certain withdrawals without penalty. These include withdrawals for birth or adoption, disability, unreimbursed medical expenses, or disaster recovery. A plus for IRAs is the exemptions they include that a 401(k) doesn't.

You can withdraw early from your IRA to pay higher-education expenses, such as tuition, books, and student fees. First-time homebuyers can withdraw up to $10,000 to put toward costs such as the down payment or closing costs. You can withdraw funds to pay for health insurance premiums while you're unemployed.

Regardless of the reason, if you're withdrawing from a 401(k) or traditional IRA, you'll also owe taxes on the amount.

Clutch, but not a crutch

When you contribute to a retirement account, you ideally want it to stay there until retirement. But having the option to withdraw funds early for certain life events is helpful in many instances.

It's better to keep money in your IRA because it will ideally be worth more down the road. But we all know that life is unpredictable, and when it does, it's nice to have the option.

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