Is A Self-Directed IRA More Powerful Than Your 401(k) At Work?

Estimated reading time: 2 minutes(Last Updated On: April 13, 2021)

Most individual retirement savers have a wide range of opportunities and account options to help them save. Quite often it comes down to two basic choices; a 401(k) plan that’s offered by your employer, and an IRA that you set up with the custodian of your choice.

But some people don’t realize that there are actually some significant differences when it comes to choosing that IRA custodian. Traditional custodians such as discount brokers, banks and credit unions offer an artificially restricted set of investment options that you can choose from. Self-directed IRA custodians allow the full range of investment choices that are permitted under the relevant IRS regulations.

For many, the main choice is between a 401(k) at work and an IRA, possibly a self-directed IRA with a custodian such as Quest Trust Company. It’s certainly possible to use both accounts, but if you have to choose between them, here are some factors to consider.

Investment Options. We mentioned it above, but this is possibly the biggest difference between a self-directed IRA and a 401(k). You can use your self-directed IRA to invest in real estate, private companies, precious metals, issue private debt, and more. At the other end of the spectrum, your employer-sponsored 401(k) will only provide you with a limited set of options. In fact, many 401(k) plans only offer a relatively small range of mutual fund choices, and you won’t even be able to invest in publicly traded stocks.

For many, having the broadest range of investment options is the most important factor in deciding between accounts, and their self-directed IRA is the clear winner.

Contribution Limits. It’s true that your annual contribution limit for a 401(k) that’s offered by your employer is likely to be higher than that for a self-directed IRA. For 2021, the contribution limit for the IRA is $6,000 (plus an additional $1,000 for individuals age 50 and older).

Employer Matching. Employer matching of your contributions to your 401(k) can be valuable, but make sure you understand the limitations and restrictions that may apply. For example, some employers only provide a match for investments that goes directly into company stock. While this might seem like a great opportunity to earn “free money” in your account, be sure that your company stock is a suitable investment for your portfolio, and that you don’t become too heavily weighted in at particular investment. Furthermore, many employers have done away with work or reduced their match programs.

You can still leverage the value of the higher contribution limits for 401(k) plans by simply prioritizing the first $6,000 (or $7,000) of your retirement savings toward your self-directed IRA, then contributing any additional amounts you have available to your 401(k). Remember that when you stop working for that employer you can always roll over your 401(k) into your self-directed IRA.

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