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The 401k is a popular form of investment because it is offered by many employers as part of a benefits package. Workers can get used to easily investing in this instrument through they payroll. However, there are some pros and cons to consider which may make a 401k a better choice for some people rather than others. Learning about how a 401k really works will help you to decide whether this is really a good place for your money or not.
Here are three common misconceptions about the 401k.
A 401k is one of the more difficult investments for an individual to access their own money when they need it. There is usually a lot of red tape and paperwork involved if you want to dig into the funds, use it for a down payment or take the whole thing out before retirement. Even if you do manage to let the money sit untouched until retirement, there is still quite a process to convert the 401k into an IRA or other investment. Taking out all of the money and using it to live off of later in life, or even re-investing it, will always be a headache.
Not everyone should be concerned about constantly putting money into their 401k, even if their employer offers matching contributions or other benefits. Things like getting rid of credit card debt or having some personal savings should generally not take a backseat to putting money into a 401k. Paying interest on debts for years or having no cushion in the event of an emergency can be a huge source of financial problems and there are other ways to save for retirement that do not involve constantly putting a certain amount of each paycheck into your 401k.
Depending on the specific 401k fund you are looking at, there can be hidden costs like transaction or management fees that really add up over time. There can also be large amounts of tax liability that will hit retirees later in life due to their 401k.
Be sure to really research these issues before deciding that a 401k is the best place for your money. There are other comparable investments that may save you much more money over time. Online IRAs are a good way to maintain control over your retirement investments and maximize your returns. The best part is, you can get started investing online with an IRA in no time.