Don’t assume that a 401(k) is the best place for your long-term savings.
If your company offers a 401(k) as part of its workplace benefits package, you may be inclined to sign up. The nice thing about 401(k) plans is that they’re super easy to fund. All you have to do is fill out some paperwork, and just like that, you’ll have contributions to that account deducted from your wages every pay period. You won’t have to worry about transferring money over yourself — or forgetting to do so.
But while a 401(k) plan can be a convenient means of saving for retirement, it’s not necessarily the best place for your money. Here are a few reasons why you should consider getting out of your 401(k) and putting your money into an IRA instead.
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1. There’s no match, and the fees are high
The problem with many 401(k)s is that the administrative costs to run them can be high. And those fees, unfortunately, are passed on to participants like you.
Sometimes, it can be worth paying higher fees in a 401(k) if you’re also getting an employer match year after year. The free money your company contributes to your account could make up for those higher fees.
But if your company doesn’t offer a match, and your plan fees are high, then it really makes little sense to keep your money invested there. As a general rule, you should consider an IRA if your 401(k)’s administrative fees are beyond the 1% mark.
2. There’s no Roth option
These days, it’s pretty common to find a Roth savings option in a 401(k). This allows you to enjoy tax-free growth in your retirement plan, as well as tax-free withdrawals. Roth 401(k)s also don’t force savers to take required minimum distributions, which gives you more flexibility in managing your money during retirement.
But while many 401(k)s offer a Roth option, some plans don’t. If you don’t have access to a Roth, it could pay to switch over to an IRA to open up that door.
3. There’s no opportunity to invest the way you want to
One major drawback of 401(k)s is that they generally don’t let you hold stocks individually. For some people, that’s not a problem. There are plenty of savers who don’t even feel comfortable choosing stocks one by one, so for folks in that boat, the fund choices offered by most 401(k)s will suffice.
But if you’re a savvy investor, then you may find it beyond frustrating to not have the ability to choose your own stocks for your retirement portfolio. And even if you don’t consider yourself a shrewd investor today, you can always educate yourself with the goal of assembling a portfolio that’s capable of beating the market (for example, generating returns that surpass those of the S&P 500). If that’s the route you want to take, then you’ll need to prepare to move your savings into an IRA.
There’s nothing wrong with choosing a 401(k) for your retirement savings. But if these situations apply to you, then an IRA may be your better bet — by far.