There are many benefits to saving for retirement in a 401 (k) plan. Not only does it offer much higher annual contribution limits than IRAs, but many companies that sponsor them also offer matching contributions. This means that if you put money into your plan from your own paycheck, your employer could also contribute money.
But while it pays to take advantage of a 401 (k) if you have access to it, you shouldn’t necessarily limit yourself to a 401 (k). Here are three pitfalls you might run into if you go this route.
1. You cannot choose individual actions
Choosing individual stocks to invest in for retirement could not only help you build wealth, but could also help you build an investment mix that works well with your strategy, risk tolerance profile and goals. But 401 (k) plans generally don’t allow you to buy individual stocks.
On the contrary, 401 (k) s allow you to invest in different funds. Some of these funds can be actively managed, which means you will pay higher investment fees (called expense ratios). Your 401 (k) may also offer a set of passively managed funds, called index funds, which come with much lower fees but might not allow you to invest the way you want.
Whether you put money into an actively managed mutual fund or an index fund, you have nothing to say about the specific stocks you own anyway. IRAs, on the other hand, do allow you to add individual actions, so you can open one above a 401 (k).
2. You could end up with high fees
Not only could you pay an investment fee with a 401 (k), but you could end up with expensive administration fees that eat away at your returns. IRAs, on the other hand, tend to charge lower administrative fees (although this is not always the case).
Now the good news is that 401 (k) plan administrators are required to disclose their fees in advance. And if you find that they are high, you can talk to your employer about switching pension providers. But these fees are something you should be aware of.
3. You can’t get a Roth savings option
Although 401 (k) plans offer more and more Roth savings options, not all 401 (k) do. With a Roth 401 (k) your contributions don’t go pre-tax, but once you fund your account your money grows completely tax-free and you can make your withdrawals tax-free. during retirement. .
A Roth 401 (k) is a smart savings option if you expect your tax rate to be higher in retirement than it is today, or if you just want to reduce your burden. tax later in life. In contrast, Roth IRAs are widely available, and while you can’t contribute directly to them if you make too much money, you can still fund a traditional IRA and then convert it to a Roth.
While it certainly pays off to take advantage of your employer’s 401 (k) – especially if there’s matching funds involved – you might not want to stick with this plan alone. In addition to opening an IRA in addition to your 401 (k), you may want to explore other options, such as funding a health savings account (which can work as a retirement savings tool. ) or even a traditional brokerage account. This way you can really set yourself up with enough cash to cover all of your senior expenses.