The 401 (k) is simply objectively better. Both 401 (k) plans and IRAs have valuable tax benefits, and you can contribute to both at the same time. The main difference between 401 (k) and IRAs is that employers offer 401 (k) plans, but people open them (using brokers or banks). IRAs tend to offer more investments; 401 (k) allow for higher annual contributions.
Whether a 401 (k) or IRA is better for a person depends on the person. A 401 (k) plan allows you to contribute more money each year before taxes than an IRA. However, an IRA tends to have more investment options, allowing for greater control and flexibility over the account. Keep in mind that a person can have both.
The good news is that you don't necessarily have to think about an IRA versus a 401 (k). You can save with both, as long as you meet the requirements and respect the contribution and income limits. But despite how positive all of this is, there are good reasons to have an IRA in addition to your 401 (k). An IRA not only gives you the ability to save even more, but it can also give you more investment options than you have in your employer-sponsored plan.
And if you have a Roth IRA, there's also a chance to earn tax-free income in the future. The most important thing to know about investing in a Roth IRA versus mutual funds is that they are not mutually exclusive. A mutual fund is a type of investment that is important for choosing asset allocation. A Roth IRA is a place where you can store that type of investment; in other words, it's an option for asset placement.
It's possible to create a mutual fund portfolio within a Roth IRA, along with investments you may have in a 401 (k) at work, a taxable brokerage account, or even a health savings account (HSA). It's important to note that, unlike 401 (k) plans, the IRS doesn't allow you to borrow from your IRA balance. Since certificates of deposit are generally considered to be some of the safest investments, you may not get the same benefits with a Roth IRA CD as with a regular Roth IRA that invests in mutual funds and other securities. A Roth IRA is a good option if you don't qualify to deduct traditional IRA contributions or if you don't mind giving up the immediate IRA tax deduction in exchange for increasing your investments without taxes and tax-free withdrawals when you retire.
However, one thing to keep in mind is that some of these entities may offer Roth IRA CDs instead of a regular Roth IRA. A Roth IRA CD is a deposit account certificate that enjoys the tax features and benefits of an IRA. Employers offer their employees the SEP and SIMPLE IRAs and are similar to 401 (k) accounts in many ways, but there are a few differences: their contribution limits are the main of them. IRAs held by brokerage and investment firms offer IRA owners more investment options than 401 (k), including stocks, bonds, certificates of deposit, and even real estate.