Welcome. Today’s blog is Part 1 of a 2 Part series about why an IRA might be better than a 401(k) to fund your retirement. We decided to break it up into two parts so that it wasn’t as much to digest in one sitting. Enjoy.
For many years American consumers have looked towards their 401(k) plan offered by the company that employed them as one of the best places to put their money for retirement, in fact, as of 2012, 401(k) plans in the United States had about $3.5 trillion in assets, an increase from 2002 of about $1.6 trillion.
It’s great choice for many consumers, especially when you consider that most employers have matching contribution plans that match a certain percentage of the funds that an employee puts into their 401(k). They’re also quite easy to set up and the money being used to grow them can be deducted automatically from a person’s paycheck, making it much easier to put money aside. Even better, many companies automatically enrolled their employees, taking away any barriers to entry.
There’s another retirement vehicle however that might, depending on your financial situation, offer a number of advantages over 401(k). It’s called an Individual Retirement Account or IRA and below are 5 ways that it might be better for you than your 401(k) plan.
The average 401(k) has a limited number of investment choices that you can choose, typically 20 or so. With an IRA those constraints disappear. For example, Vanguard, a popular IRA, offers more than 150 investment choices while T. Rowe Price has approximately 100 of its own mutual funds and Fidelity nearly 200. They also allow an investor to purchase mutual funds from other companies and, for example, at Fidelity there are over 10,000 funds from hundreds of firms to choose from.
What having an IRA thus does is give a consumer much more ability to diversify their investments and lower their risk. For consumers want to be able to “shop around” an IRA offers that ability much better than a 401(k).
Expense and other fees are typically quite high for a 401(k) investor and, according to a study by the Investment Company Institute, are approximately .63%. That means that for every $1000 invested, $6.30 will go to fees, and that doesn’t cover all of them. On the other hand, if you purchase a no-load mutual fund for your IRA your costs per $1000 invested drop to $1 per thousand or even less.
“Fees are one of the few things that investors can control,” says Joshua Itzoe, partner and managing director of the institutional client group at Greenspring, a wealth management firm based in Towson, Md. “The lowest-cost way to invest is through index funds or ETFs. “If you have at least $10,000 to invest in the Fidelity fund, your expenses drop to 70 cents per $1,000 invested.” he added.
Did that wet your whistle for more information? We hope so, so make sure come back to visit soon for Part 2 and the 3 remaining reasons why an IRA might be a better choice for your retirement funds than your 401(k). See you then!