In addition to having more options of where you can invest your money, you’ll likely save money in fees with a Roth IRA compared to a 401(k). To begin, most major brokerage companies won’t charge you to make a trade, and there’s no ongoing fee to hold a company’s stock. While ETFs do have expense ratios, they’re generally much cheaper than the fund options you’ll have with your 401(k), which can charge up to 2% of your invested amount.
For example, if you contribute $6,000 to your 401(k) annually for 20 years with an 8% interest rate, a 2% expense ratio would have cost you over $53,000 through that time.
You may pay more in taxes in retirement
When you make contributions to your 401(k), you do so with pre-tax money. While this is a great benefit because it lowers your taxable income, you’re not off the hook completely; you’ll have to pay taxes on any distributions you receive in retirement at your tax rate at the time. On the other hand, with a Roth IRA, you contribute after-tax money, so you won’t owe taxes on any distributions you receive in retirement.
You may find that with a 401(k), you’re paying more in taxes overall than with a Roth IRA. Yes, you technically paid taxes on your Roth IRA already, but by the time you reach retirement age, it’s had time to compound tax-free. Depending on your tax bracket in retirement, you could be paying more on your 401(k) withdrawals than you did with funds contributed to your Roth IRA.
