If your company offers a retirement plan to employees, there’s a strong chance that is it a 401(k). While these can be excellent investments for retirement planning, that doesn’t mean they are the ideal solution for everyone. If you are trying to determine if participating in your company’s 401(k) is the right move, here are some key points you need to consider.
Are There Alternatives to Participating in a 401(k)?
It’s important to understand that there are alternatives to joining your company’s 401(k) plan. This usually means looking outside of your employer’s offerings. Nearly anyone can open a Traditional IRA or Roth IRA with another financial institution as a method for preparing for retirement.
One benefit of IRAs is that many banks and investment firms that provide these products offer a wider range of investments to choose from. Most offer far more than what may be available through your employer’s 401(k). Many 401(k)s are limited to mutual funds. However, an IRA can have a larger selection of index funds while also giving you the ability to select ETFs (exchange-traded funds) or individual stocks to add to your portfolio. This means you have more control when choosing how your money is invested, which can be beneficial.
Additionally, the fees associated with an IRA may be lower. This allows more money to go towards the investments and less money toward administrative costs. Plus, if you qualify for a Roth IRA, there are tax advantages to consider, especially relating to tax-free growth. Typically, withdrawing funds early is easier and less expensive as well. This is especially true with a Roth IRA.
Are There Any Benefits for Participating in the 401(k)?
Just because IRAs can offer you some flexibility that isn’t available in a 401(k), that doesn’t mean you should forgo the option through your employer.
First, saving with a 401(k) is easy, since the funds come straight out of your paycheck. This makes the process incredibly automatic, meaning you don’t have to focus on it much after it is set up.
Second, many companies offer 401(k) matching. Usually, the employer provides a matching amount of funds up to a specific percentage of your paycheck. Essentially, this acts as free money that you get to save toward your retirement. And, as long as you are vested, you get to take it with you even if you change employers.
Finally, the annual contribution limit on a 401(k) is quite high. For 2018, that amount is $18,500. Anyone over the age of 50 can also make additional catch-up contributions of up to $5,000 annually. In comparison, you can only add $5,500 a year to an IRA if you are under 50. For those over 50, the IRA annual contribution limit is $6,500.
The Choice Is Yours
Ultimately, participating in your employer’s 401(k) up to the full-matching amount can be smart, as that gives you free money for retirement. Beyond that, it depends on your unique situation. However, there is nothing that says you can’t have an IRA and a 401(k), letting you get the best of both worlds. Just stay on top of the contribution limits to make sure you don’t exceed them.
Are you currently participating in your company’s 401(k)?
More from Fine-Tuned Finances:
- When Should You Start Saving For Retirement?
- Traditional IRAs Compared to Roth IRAs:
- Good Reasons to Invest in a Roth IRA
Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.