Factors to Consider When Deciding to Use Your Company’s 401 (K)

If your company offers a retirement plan, it usually makes sense to use it, but not always. Sometimes it’s best to ditch your 401 (k) company and open an IRA yourself. Here are a few factors to consider when making your decision.

Some employers offer a match. This means that regardless of the amount you put aside in your employer-sponsored retirement account, they will match a certain amount. This is a great deal and you should definitely take advantage of it . But if they don’t match, it might be time to consider other options, such as a traditional or Roth IRA, as Magnify Money points out. They suggest a few more factors to consider before moving on to your company’s 401 (k):

High fees

If your employer is offering 401k without matching, a good way to assess if it is a good investment vehicle for your retirement savings is to look at fees. Often, both workers and employers do not know how much it costs them. After all, 3% seems like such a small figure, doesn’t it?

3% may seem like a very small amount to pay in commissions, but this example will show you how a small percentage can affect your retirement savings … Even if your 401k has high fees, be sure to consider employer eligibility. In many cases, the match will more than cover the fees, making 401k a good investment despite the high fees.

If you need flexibility

401k, while they offer tax benefits and often free money in the form of an employer match, don’t offer any flexibility. Contributions are automatically pre-tax deducted from an employee’s salary at predetermined amounts and cannot be withdrawn without severe penalties until age 59 ½. For many families, saving and investing money isn’t just about retirement. It’s about college, medical expenses, large purchases, and even vacations.

Even if you need flexibility, it is a good idea to take advantage of an employer match. But beyond that, you might consider setting up a health savings account, a 529 plan for college savings, or a taxable investment account.

As you contemplate the above, notice also the Ladder of Salvation by author Ramit Sethi. This is hisadvice on investing in your 401 (k )company and what you should do with the rest of your money:

First of all, if you have a 401 (k) match in your office, take it. Take it because it’s free money … so use it before the match. Then pay off your credit card debt. Now if you still have money left, I would like you to go to the Roth IRA then … If you still have money left after [maxing up] your Roth IRA … go back to your 401 (k) and contribute outside of the match.

If you’re considering your company’s 401 (k), recruiting is probably the most determining factor. But it is also helpful to know the size of the commission and consider your flexibility and other savings options. Check out the full Magnify Money post at the link below.

When to Avoid 401k Company | Increase money


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