Because 401(k) plans offer limited investment options, you may be restricted to only buying shares in mutual funds, which often charge higher fees than other types of securities accessible with IRAs. By contrast, investments in IRAs typically come with few or no fees.
The funds are ranked by each firm's average fund-level asset-weighted expense ratio for both institutional and retail shares. The scorecard makes it easy to learn 401(k) fees lower than IRA related fees. Moreover, most retirement plan participants don't understand that they pay fees for their investments.
An IRA generally has more investment choices than a 401(k). An IRA allows you to avoid the 10% early withdrawal penalty for certain expenses like higher education, up to $10,000 for a first home purchase or health insurance if you are unemployed.
Whether a 401(k) or an IRA is better for an individual depends on the individual. A 401(k) allows for more money to be contributed each year on a pretax basis than an IRA. One benefit to IRAs is that they tend to have more investment options, which allows for greater control and flexibility over the account.
Roth IRAs aren't free, though. All of the major providers charge fees on these accounts. These fees come in various forms: account maintenance fees charged by your provider, transaction fees for trading via your Roth IRA, and—for most Roth IRAs—mutual fund expense ratios and sales loads.
There is no cost to open and no annual fee for Fidelity's Traditional, Roth, SEP, and Rollover IRAs. A $50 account close out fee may apply.
Many financial advisers charge based on how much money they manage on your behalf, and 1% of your total assets under management is a pretty standard fee.
Lower costs. IRAs often have lower account and investment-related fees than 401(k)s. On average, you can expect to pay an annual fee of 1%-3% of the total 401(k) account value plus administrative and management fees each year.
401(k)s generally allow higher contributions but offer fewer investment options, whereas IRAs have lower contribution limits -- and income caps for high earners -- but offer the opportunity to invest in almost any stock, bond, or mutual fund.
Once you reach 59½, you can take distributions from your 401(k) plan without being subject to the 10% penalty. However, that doesn't mean there are no consequences. All withdrawals from your 401(k), even those taken after age 59½, are subject to ordinary income taxes.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
You generally must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022).
If you withdraw money from your 401(k) before you're 59 ½, the IRS usually assesses a 10% tax as an early distribution penalty. That could mean giving the government $1,000, or 10% of a $10,000 withdrawal, in addition to paying ordinary income tax on that money.
The most common forms of hidden 401(k) fees are revenue sharing and wrap charges. Revenue sharing is paid by certain mutual funds. Wrap charges are paid by variable annuities.
By far the largest component of 401(k) plan fees and expenses is associated with managing plan investments. Fees for investment management and other investment-related services generally are assessed as a percentage of assets invested. You should pay attention to these fees.
Many 401(k) participants pay an average all-in fee of 2.22% of their assets, but most 401(k) accountholders will pay a wide range between 0.2% and 5%. These percentages may sound small, but they can make a big impact.
The main difference between 401(k)s and IRAs is that 401(k)s are offered through employers, whereas IRAs are opened by individuals through a broker or a bank. IRAs typically offer more investment options, but 401(k)s allow higher annual contributions.
Roth IRAs might seem ideal, but they have disadvantages, including the lack of an immediate tax break and a low maximum contribution. Tax Specialist | Personal finance reporter for 16+ years, including work for the Wall Street Journal and MarketWatch.
The Bottom Line. In many cases, a Roth IRA can be a better choice than a 401(k) retirement plan, as it offers more investment options and greater tax benefits. It may be especially useful if you think you'll be in a higher tax bracket later on.
401(k): You can contribute up to $23,000 in 2024 ($30,500 for those age 50 or older). IRA: You can contribute up to $7,000 in 2024 ($8,000 if age 50 or older). You can contribute that amount to a traditional IRA or a Roth IRA, or you can divvy up your money into each type of plan.
Since you contribute after-tax dollars, your earnings and withdrawals are not taxed in retirement. That's a serious advantage to investors, particularly for young investors. “A Roth IRA has the benefit of providing tax-free distributions in retirement,” says Wendy Kelley, national IRA product manager at U.S. Bank.
You can roll over money from a 401(k) to an IRA without penalty but must deposit your 401(k) funds within 60 days. However, there will be tax consequences if you roll over money from a traditional 401(k) to a Roth IRA.
What Are Normal 401(k) Fees? 401(k) fees can range between 0.5% and 2%, based on the size of an employer's 401(k) plan, how many people are participating in the plan, and which provider is offering the plan. The average annual fee charged by most funds is 1%, as per the Center for American Progress.
More On Tax Deductions:
Certain IRA administrative fees, whether or not you're currently taking distributions, are deductible, but they have to be paid by the account owner's non-IRA funds.
The good news is, you don't need to be an investing expert to pick appropriate investments for your IRA. But if you're still anxious about it, you can even consider opening your IRA with a robo-advisor, which will pick your investments for you based on your goals and risk tolerance.