If you have access to a 401(k) plan through your employer, you might consider yourself lucky. Not everyone has the option to save for retirement in a 401(k), and those who are limited to saving in an IRA get less leeway with regard to annual contribution limits.
But just because you have a 401(k) doesn’t mean your plan is great, or that it’s worth saving in. Here are a few reasons why your 401(k) plan might end up failing you.
1. There’s no employer match
A big benefit of saving in a 401(k) is getting to score free money for retirement. That’s because many companies that sponsor these plans match worker contributions to some degree.
But if your 401(k) doesn’t come with any sort of match, that, frankly, kills a lot of its appeal. And so you may want to consider saving your money elsewhere.
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2. There’s no Roth savings option
There’s a benefit to saving for retirement in a Roth account, and it’s scoring tax-free investment gains and tax-free withdrawals during retirement. The latter is really important, because many seniors don’t want to deal with taxes at a time in their lives when money is limited.
But while an increasing number of 401(k) plans are offering a Roth savings feature, it’s not automatically universal. And if your 401(k) doesn’t have a Roth version, you may want to go out and open a Roth IRA on your own instead.
3. Your investment choices are limited
One notable downside to 401(k)s is that they don’t let you buy individual stocks to invest in. Rather, you get different funds to choose from, and those funds charge different fees.
Now if you’re a hands-off type of investor, you may not mind not being able to hand-pick stocks for your retirement plan. And in that case, you may be more than content loading up on low-cost index funds in your 401(k).
But if you’re good at investing and know what it takes to research companies, then the idea of not getting to choose stocks to put your retirement savings into may be bothersome. Furthermore, while index funds may be a solid bet for most investors, they may not align with your specific strategy.
Index funds are great at taking the guesswork out of investing, but one thing they won’t let you do is beat the market. To do that, you’ll have to assemble a portfolio of individual companies whose performance is top tier. And so if being limited to funds only bugs you, then it may be time to save outside of your 401(k).
Don’t feel stuck with a 401(k)
Just because you have access to a 401(k) doesn’t mean that’s a plan you have to save in. Granted, if your 401(k) comes with a company match, then it pays to put in enough money to snag that free money. But if that’s not the case, then there’s no reason you shouldn’t explore other savings options, whether it’s opening a traditional IRA, a Roth IRA, or a combination of both.
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