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Why IRAs Have An Extra Edge Over 401(k)s When It Comes To Your Retirement

For most Americans who are employed, a 401(k) is the preferred savings option. Of late, the bulk of retirement savings are being transferred from the employer-sponsored plan to IRAs (Individual Retirement Accounts), which would suggest that people seem to favor these accounts more. The older Americans, retired or about to retire, are driving this trend while they derive benefits from the perks and flexible withdrawal options offered by IRAs. This way they can have easy access to pay for their current living expenses as well as start generating steady sources of income one they stop receiving paychecks.

In the period of 2012 to 2017, 96% of all of IRS contributions, about $2 trillion of it, came from rollovers. The future estimates for IRAs look good too, with a 37% rise by 2022, and more than the 20% rise estimated for 401(k) assets. Experts in the field of retirement planning reason why IRAs are better placed for retirement assets;

Flexible withdrawal options

We congratulate on the sizable nest egg of funds you have saved up. But how easily and quickly can you get your cash out of your account and into your hands? In this matter, IRA scores big as they offer more flexible options when it comes to withdrawal.  In a 401(k) plan, the common distribution option is a lump sum, which is basically an all-or-nothing option for the holder of that account. Taking the entire lump sum out would imply that your money cannot keep growing in your account according to the market trends.

On the other hand, in IRAs, the account holder can withdraw his or her money at anytime, and partially or in smaller denominations if they wish. In the end most 401(k) account holders remain worried about the kind of access they have to their money, whereas IRA account holders rest easy. It is to be noted that both 401(k) and IRS participants can withdraw their funds, without any IRS tax penalty, post the age of 59.5 years.

More investment options

According to a study in March by Investment Company Institute and BrightScore, the ordinary 401(k) offers, on an average, 29 investment options. This number is much larger for IRAs. A investor could have hundreds of more funds to choose from, should they have an IRA with an online brokerage or mutual fund company. The investment options may also include bonds and stocks, even those with foreign origins.  That’s quite a large menu, isn’t it?

More access to advice

Another advantage to having IRAs set up with a mutual fund firm, a brokerage company or even a smalltime financial advisory firm, is the access to professional advise when it comes to investments. This is highly needed, especially when one is about to retire and withdraw their savings from their IRA accounts to keep some income coming in. It has been seen that once retirement hits, people have very little clue what to do with their ‘giant pile of cash’, which they suddenly have. A little expert guidance can help them make their money work hard while they enjoy retirement.

Don’t panic; 401(k) isn’t a terrible option

This is not to say that you don’t benefit at all from keeping your ex-employer’s 401(k), so don’t be in a tearing hurry to go all out. Study the benefits it has to offer, as some these are;

Lower Costs

Quite often, as is the case with a 401(k), some lucrative investment options are cheaper. Access to lower cost funds increase, as the companies are able to collectively invest the money of other employees. This will cost much lower than any retail counterpart.

Less is more

To a person who has just received a rather large nest egg of money, many investments options could confuse and daze them. As IRA offers many investment products, too many of those could be overwhelming. Because of the limited 20 options in a 401(k), life is simpler and easier as the prospective investor can study the cost and benefit of each, to build up their investment portfolio.


IRA holders are not the only privileged few who can get sound financial advice. A 401(k) sponsor may also hire a fiduciary advisor who can provide the proper guidance and advice which is sought. Staying with a 401(k) may be a smarter move for the employees who hold company stocks, whose value has appreciated greatly. This is because of a federal tax rule called the NUA (Net Unrealized Appreciation) by which employees can benefit from huge tax savings if the shares are sold off eventually.

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