Don’t Blindly Invest In A 401K
July 31, 2008 – 6:04 am
The sad fact is many companies don’t match invested funds in a 401k. If your company does offer a match…great. Take full advantage of it.
If, however, your firm does not offer a match you might consider investing in a Traditional or Roth IRA instead. You can make this type of investment automatic, and you’ll have much more control and choice over the investments you can select for this type of retirement account. Everyone’s situation is different, so please do you own research and make your own decision as to whether a Roth IRA or a Traditional IRA is right for you.
My own personal preference is to use a Roth though, and my feeling is that most financial advisers would recommend this approach as well based on the fact that I’m:
- young
- I don’t earn much, so my tax rate is currently low
- I can always access the invested portion of my Roth without tax consequences if I absolutely had to in an emergency
- there are no required minimum distributions at 70 1/2 like traditional IRA’s
My company does provide a (small) match, so I still contribute to a 401k. Then I fund as much of a Roth as I can. It works for me, but please make your own decision and don’t just blindly follow the pack by investing in your companies 401k if it doesn’t provide you with the benefits you could get elsewhere!
In order to be fair to the 401k, I should also point out that you can contribute more to a 401k than to a traditional or Roth IRA. The current limit on a 401k is 15,500 per year, and for an IRA (Roth or Traditional) is 5,000. As always things are more complicate if you’re a “Highly Compensated Employee” (>$105,000 per year in 2008) and you may not be able to contribute to a Roth if your have a high household income. I would argue that if you can contribute the max to your 401k, however, you should probably consider the diversification benefits of investing in several different ways from a tax perspective. Having all your funds in a Traditional IRA or 401k may not be a great choice. It could be better to have some funds in each of the following types of accounts, which would give you some level of “tax-diversification”: 401k or Traditional IRA, Roth IRA, Taxable Accounts.
Image Credit: Nieve44/La Luz
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2 Responses to “Don’t Blindly Invest In A 401K”
Great post! I am in the midst of doing this exact thing – switching my contributions from 401k to a Roth IRA because my company doesn’t match. I’ve been blindly putting money into the 401k, which I guess isn’t horrible since i’m still saving, but I didn’t consider what other options I had.
Good advice – I’ll be following it soon!
By Peter on Jul 31, 2008