You’ll need savings of your own to get by in retirement — there’s no question about that. Sure, you may have other income sources, like a small pension or Social Security benefits. But chances are, the bulk of your buying power during your senior years will come from the savings you amass.
Now you’ll often hear that maxing out a 401(k) plan is a smart thing to do, since it clearly means socking away a lot of money for retirement. But before you go that route, you may want to consider some alternatives.
Let’s get one thing out of the way. If your employer offers a 401(k) match, then it’s a wise idea to contribute enough to that plan to snag that free money in full. But that doesn’t mean you have to max out your 401(k), and you may not want to for a number of reasons.
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First, 401(k)s often come with limited investment choices. And they don’t let you buy individual stocks. That could be a problem if you’re a hands-on investor who wants to actively build a retirement portfolio.
IRAs, on the other hand, do allow you to hand-pick stocks. And so that alone could make an IRA a better bet for you.
Then there are fees to consider. Employer-sponsored 401(k)s are notorious for charging costly administrative fees which could eat away at your returns. Similarly, unless you stick to index funds, you could get stuck paying higher investment fees in your 401(k). Those, too, will limit your savings’ growth.
Furthermore, while many 401(k) plans now come with a Roth savings option, some don’t. And if yours doesn’t, that could prove problematic.
The upside of saving in a Roth retirement plan is getting to enjoy tax-free withdrawals during your senior years, when money may be tighter and you don’t want the burden of owing the IRS money. And while Roth 401(k) don’t take required minimum distributions off the table the way Roth IRAs do, the ability to secure tax-free withdrawals is still huge. But if your 401(k) doesn’t offer a Roth option, you may want to house at least some of your savings elsewhere.
Maxing out a 401(k) plan year after year could set the stage for a financially comfortable retirement. But before you do that, do some research and see if it pays to spread your money around instead.
You may decide to keep some of your retirement savings in your company’s 401(k), but put the rest into a Roth IRA. You may even decide to keep some of your retirement savings in a regular brokerage account, even if that means forgoing some tax savings.
With a 401(k) or IRA, you’re supposed to wait until age 59 1/2 to withdraw your funds or otherwise risk penalties. But what if you want to retire sooner than that? Putting some of your money into a regular brokerage account could buy you more flexibility.
All told, you may do just fine maxing out your 401(k) throughout your career. But it pays to explore different options before assuming that’s the best plan.
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