Why you should choose an IRA over a 401(k)

Retirement planning comes in many shapes and forms, but 401(k)s are by far one of the most popular saving options. They're run through a person's employer and contributions can be directly withdrawn from a person's paycheck. While a 401(k) is simple, it may not be the best option for all retirement savers.

Individual retirement accounts (IRAs) are viable alternatives. Here are a few reasons why you should consider them: 

More investment choices

According to a recent study by the Plan Sponsor Council of America, the average 401(k) plan offers participants a selection of just 19 funds. Such limited options could have retirees putting too much of their nest egg in one area. If a certain industry tanks, you could find yourself without any of your hard-earned income that you spent so much time saving . By contrast, IRAs allow savers to invest in thousands of different stocks and funds, enabling you to build a portfolio that matches your level of risk tolerance. 

Lower fees 

Convenience comes at a high price in the realm of retirement accounts. According to a 2012 study from the Investment Company Institute, the average 401(k) investor paid a $6.30 for every $1,000 that they put into their account. While this may not seem that high, there are plenty of other charges that fund managers will tack on to 401(k) participants to increase their bottom line. By contrast IRA fees hover in the range of $1 for every $1,000 invested. These expenses can often drop further once your account balance reaches a certain point. 

More penalty-free withdrawal options 

In most situations, if you withdraw money either from a 401(k) or IRA you will pay taxes on the income and be slapped with an additional penalty. There are a few exceptions, however, that only apply to IRAs. First-time homebuyers can withdraw up to $10,000 to be applied toward the down payment of a house. The same action can also be taken to finance higher education costs for the account holder or a family member. 

In the case of Roth IRAs, investors can withdraw contributions tax-free and without any penalties. The key word here though is "contributions" meaning an early withdrawal of actual investment earnings will most likely result in a 10 percent penalty. 

Access to Roth Advantages

The biggest draw of a 401(k) plan is that you can delay paying taxes for decades while money in the account continues to grow. Putting the money in a traditional IRA presents the same problem, but a Roth plan allows you to pay taxes on a lower amount up front. Investors can then enjoy decades of growth without having to worry about when Uncle Sam will arrive to take his part. 

Soon-to-be retirees looking to maximize their retirement income should consider alternative asset protection strategies.