Why You Shouldn’t Put All Your Eggs in One 401k Nest

Written By Mary Beth Eastman
Last updated June 4, 2018

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June 4, 2018

Simple. Thrifty. Living.

If you’re like most Americans, you contribute to a 401k through your workplace. While the resulting retirement savings can be substantial, there are many drawbacks to a 401k. Instead of using this vehicle exclusively, consider additional investment options.

Your 401k has an appealing automatic nature, so you can just sit back and let the deductions come off your paycheck. You may benefit from employer matching, so your savings grow more quickly. Plus, you get a tax break on your contributions the year that you make them.

Your 401k may be too automatic, so that you don’t pay attention to how much you actually save. Especially if you are young and have additional life goals, like education or travel, you may pull money out of the 401k and pay a significant penalty.

Your 401k contributions are capped each year, which means you may not be able to meet your retirement savings goals with a 401k alone. Many experts recommend that you have the equivalent of your annual salary saved by age 30.

There are a number of ways you can invest for retirement outside the 401k. For example, you may be able to contribute to a Roth IRA. While the annual contribution limits into a Roth IRA are much lower than for a 401k, you can withdraw your Roth IRA contributions at any time without paying a tax penalty. On the flip side, you don’t get a tax deduction in the year you make the contributions.>

A traditional IRA works similarly to a 401k in that you get a deduction in the year of the contributions and pay tax when you withdraw money later. For both kinds of IRAs, you have great freedom to choose what kind of investment product you want to use inside the IRA, from stocks to farmland.

You can also have an investment account through a brokerage firm. This option gives you freedom to choose where to invest your retirement savings, with the assistance of an advisor. You will have to pay capital gains tax, but there are no annual limits on contributions. For many people, an investment account is essential to meeting retirement goals.

So, what options are best? It depends on your personal life goals and how much flexibility you want to have with your money. The best news is you have choices and can always change your mind down the road as your circumstances change.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

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