The No-Brainer Retirement Account I'd Choose Way Before a 401(k)

With over 60 million people participating in a 401(k) plan, it's the most popular retirement account in the country. However, being the most popular doesn't always mean it's the best.

An IRA, both traditional and Roth, can be a better retirement account option in many situations.

Traditional IRAs are comparable to 401(k)s in that both allow you to deduct your contributions and lower your taxable income. In the case of a traditional IRA, deduction eligibility depends on your filing status, income, and if you have a 401(k) (or similar) plan at work. You contribute after-tax dollars to a Roth IRA, but withdrawals are free in retirement if you meet other requirements.

Withdrawal flexibility when you may need it most

You shouldn't contribute to a retirement account with the intention of withdrawing money before retirement, but sometimes life throws a curveball your way, and that might be the only option. With a 401(k) and IRAs, making withdrawals before the age of 59 1/2 often results in a 10% early withdrawal fee. Money received can also be counted toward your annual income, increasing your tax bill.

There are exceptions for both 401(k)s and IRAs, but IRA exceptions are more lenient and offer more flexibility. 

You can withdraw money from your IRA for qualified higher education expenses like tuition and other non-room-and-board fees required for enrollment. First-time homebuyers can also withdraw up to $10,000 to put toward the purchase of their home.

Recently unemployed and worried about medical insurance? You can use an IRA to pay your medical insurance premium while you're out of work. This list isn't exhaustive, but it shows how useful IRA flexibility can be in different life situations.

It's also worth noting that Roth IRAs don't have required minimum distributions like 401(k)s and traditional IRAs. You can keep your money in the account (hopefully growing) as long as you please. For people who may not need their Roth IRA income in retirement, this could be a good way to pass on a sizable gift to a beneficiary when you pass away.

You can tailor IRA investments to fit your needs

For better or worse, your 401(k) plan provider gives you a set list of investment options to choose from. On the good side, it's great for investors who want to be as hands-off as possible and not fall into choice overload. The downside is that the options are often very limited compared to your choices in the general stock market.

You don't have that problem with an IRA because you can invest in any single stock or exchange-traded fund your heart desires. If you can buy it through your regular brokerage account, you can almost certainly buy it through your IRA.

Your investments should reflect your risk tolerance, financial goals, and investing style. This might not always be the case with the provided 401(k) options. It can be, for sure, but it's not guaranteed. The flexibility of IRAs allows you to make sure your portfolio reflects you.

Does a Roth or traditional IRA make sense for you?

The maximum amount you can contribute to an IRA is $6,500 annually ($7,500 if you're 50 or older). You can contribute to multiple IRAs at once, but it makes sense just to choose one for the given year and stick to it. Choosing between a Roth and a traditional IRA often comes down to your current tax bracket versus your projected tax bracket in retirement.

A traditional IRA could be more beneficial if your current tax bracket is higher than it'll probably be when you retire. You may be able to deduct your contributions, reduce your tax bill, and then pay taxes on withdrawals in retirement when your tax rate is lower.

On the other hand, a Roth IRA may make more sense if your current tax bracket is lower than your expected tax bracket in retirement. That'll allow you to pay taxes on your contributions at a lower rate now and then benefit from tax-free withdrawals in retirement when your tax rate may be higher.

Those aren't the only rules for choosing between the two, but it should be a key factor. You also want to consider if you'll eventually cross the Roth IRA income limit. In 2023, the most you can earn and still be eligible to contribute to a Roth IRA is $153,000 if you're single and $228,000 if you're married and filing jointly. If you think you'll eventually be ineligible, take advantage while you can.

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The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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