Home Financial consultant Are 401 (k) worth it? | 401k

Are 401 (k) worth it? | 401k


While 401 (k) plans usually come with benefits that promote long-term savings, there are some drawbacks you may encounter as well. Understanding the potential drawbacks of 401 (k), along with how to fix or work around them, can help you better plan for your financial future.


Some of the common drawbacks of 401 (k) include:

  • A small or non-existent business match.
  • High fees associated with the account.
  • Few investment opportunities for your funds.
  • A wait until you can keep company contributions.
  • Difficulty accessing funds early on.
  • Tax implications for withdrawals.

Here’s a look at some of the problems associated with 401 (k) and what you can do to compensate for each downside.

The 401 (k) match is minimum

Some employers offer to match up to a certain amount of your contributions to the plan. For example, your employer might suggest that you contribute 50 cents for every dollar you save in the plan up to 5% of your salary. If you earn $ 50,000 per year and contribute $ 2,500 to the account, your employer will contribute $ 1,250.

Not all employers offer a 401 (k) match, and even if they do, the match may not seem like a lot. A match of 50% of your contributions up to $ 500 would indicate that if you contribute $ 2,500 to the account, the employer would add $ 500.

If you are unsure if your company offers correspondence, you can check with your employer. If there is a match, it’s usually worth contributing enough to get the maximum match. “It’s free money for you,” says Rafael Rubio, president of Stable Retirement Planners in Southfield, Michigan. If there is no match, you can still easily save throughout the year by automatically having funds withdrawn from every paycheque.

You are allowed to make 401 (k) contributions up to $ 19,500 of your own salary in 2021, and if you are 50 or older, you can contribute an additional $ 6,500 into the plan. The amount you contribute will be deducted from your salary and will not be considered taxable income until it is withdrawn from the account. This could give you tax relief for every year you contribute to the account.

High 401 (k) fees

401 (k) plans usually come with a number of expenses that can include management fees and record keeping fees. “Plans are needed to release expense information each year,” says Julian Schubach, vice president of wealth management at ODI Financial in Lynbrook, New York. Yet it can be difficult to find these communications. “Most attendees have no idea what fees they’re paying,” says Schubach.

To learn more about the costs associated with your 401 (k), you can ask the human resources department or the plan sponsor to help you decipher the fine print. You can also compare the fees to the counterpart: if your employer offers a high counterpart, those contributions could outweigh the costs of the account.

Few 401 (k) investment opportunities

When you put funds into the 401 (k) account, you have the option of purchasing different types of investments. However, you might find that the selection is limited. “Plan sponsors have traditionally compiled a list of 20 to 25 mutual funds, half of which are maturity funds,” says Chris Gure, investment consultant at Fortress Financial Partners in Raleigh, North Carolina. A target date fund is a collection of investments designed to grow more conservatively over a period of time until a fixed date in the future. Target date funds generally coincide with the year a person expects to retire.

Be sure to compare all of the investment options available in your 401 (k) plan. You may be able to find a selection that suits your financial needs. You may also want to consider investing funds in a separate account, such as a Roth IRA, which might offer additional investment choices.

A wait until you can keep the company’s contributions

If your employer pays funds to your 401 (k), the funds may not be yours immediately. Companies often have vesting schedules, which refer to how long you must stay at a particular job until you hold company contributions. If you quit your job before the funds are acquired, you will not receive the money that still belongs to your employer. When the funds are fully vested, they will remain in your account even if you change companies.

Difficulty accessing 401 (k) funds

When money is put into your 401 (k) account, the plan is designed to keep the funds there for a long time. “In most cases, distributions from a 401 (k) plan before age 59 1/2 are subject to early withdrawal penalties of 10% plus federal and state income taxes,” explains Chance Burroughs, Financial Advisor at Manske Wealth Management in Houston. , Texas. Some plans allow for a 401 (k) loan or withdrawals for financial hardship if you experience a financial emergency. However, if you borrow from the account, you will usually have to repay the amount plus interest within five years.

401 (k) Tax implications

When you contribute money to your 401 (k) plan, the amount is deducted from your salary and you will not be taxed on it during the year you make the contribution. However, you will have to pay tax on your contributions and investment earnings when you withdraw funds from the account. “Without knowing for sure how your 401 (k) will work or what the taxes will be in the future, your 401 (k) can be a tax time bomb,” says Rubio.

To reduce your risk of high taxes, it can be helpful to monitor the account and forecast your future income. Think about your minimum required distributions, which are withdrawals you will need to start making at age 72. “Calculate what your RMD will be at age 72,” says Rubio. “This will allow you to estimate the tax implications you will have. The exercise can also help you determine whether to invest more in other vehicles such as a Roth IRA, which taxes contributions the year you make the deposit, but not when you withdraw the funds later.


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