You’ll often hear that saving for retirement is essential if you want to end up living comfortably during your senior years. Social Security will only replace about 40% of your pre-retirement wages if you’re an average earner. And most retirees need about twice that much income to be able to cover their bills while maintaining a nice standard of living.
Funding a 401(k) plan could mean snagging an employer match, which is basically free money for your retirement. So if your employer plan has a match on the table, then it pays to contribute enough to claim it in full.
But that doesn’t mean you should max out your 401(k) this year. Once you’ve claimed your company match, you may want to put the rest of your money into a different savings plan.
401(k)s have their flaws
One benefit of 401(k) plans, besides offering matching opportunities, is that they have higher contribution limits than IRAs. But you should also know that 401(k) plans often limit your investment choices substantially.
For one thing, you can’t buy individual stocks in a 401(k) like you can in an IRA. Rather, you’re generally limited to a handful of different funds, from target date funds to mutual funds to index funds.
Because your investment choices in a 401(k) aren’t as broad, you may find that your current plan doesn’t allow you to assemble the portfolio you really want. And, you may find that the fees you’re stuck with are higher than what you’d like them to be. An IRA might solve for both issues, making it a better choice.
Also, you may want to save in a Roth account for retirement so you can enjoy tax-free withdrawals later in life. But not all 401(k) plans have a Roth component. So that would be another reason not to max out your employer plan this year.
Take advantage of different options
It’s possible to save for retirement in more than one account. So before you rush to max out your 401(k), consider whether it really meets your needs. If not, you can always look at putting in just enough money to claim your full employer match, but then looking to other options for the remainder of your retirement plan contributions.
In addition to an IRA, you may want to look at saving for the future in a health savings account (HSA) or even a taxable brokerage account. HSAs offer a lot of tax benefits, (and can be used for nonhealthcare expenses without penalty once you turn 65), so that alone is a good reason to fund one.
And while a regular brokerage account won’t give you any tax breaks, you’ll get the flexibility to contribute as much money as you want and to take withdrawals whenever you want. So, all told, it pays to explore your choices so you’re able to land on the right mix.