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Is a 401K worth it anymore?

  • 4 min read

Is a 401K worth it anymore?


There’s many options for financial planning for retirement or financial security. One of them has always been a 401K fund. The question currently: is having a 401K even a good idea anymore? Is it worth it to get into a 401K?


Let’s take a look at the pros and cons: 


A disadvantage is if you have your money in a 401K. It’s locked up and you don’t have a lot of access to liquidity of that money. It’s not like a bank account where you can just withdraw money from. Certainly you can take hardship withdrawals and you can do limited extractions from your 401K. There’s a lot of penalties and tax payments that come along with your 401K. Balance has been accrued by tax advantage contributions from your paycheck, and if you start taking money out you’re gonna have to pay back the taxes. Plus the penalty on top of that money. In addition you could take out a loan against your 401K. Now you’re borrowing money and you have interest payments on that loan. 


The other downside is a 401K might have fees from the financial institution that’s managing your account. If you have it in Fidelity, or any of the other financial institutions that run 401Ks; many times they have annual fees or management fees that take away from your funds. You want to take that into account. The other downside is you have limited options of where to put your money. May only have a certain selection of choices. What type of fund to put your money in, will it might be high growth, interest, safety, etc. You might not be able to pick and choose stocks, or pick and choose where your money’s going. Most 401K funds have a list of selected mutual funds that you can put your money into. Besides that, you don’t really have any options.


Another downside is portability.


If you leave your job or move you have to now switch it over from one job to another. What are your alternatives to a 401K.. well you could do an IRA, individual retirement account, a Roth IRA (which is similar a SEP). IRA is for self-employed people. You may also do regular brokerage accounts. Now those are not going to have the tax advantages, however, you may find that the additional investment options give you more benefits than the tax advantage. 




Here’s the thing, if you are getting an employer match to your 401K then it’s a no-brainer because it’s free money. Some employers will match up to two or three percent of your income and that’s free money! For example if you make a hundred thousand dollars a year and you put in three thousand which is three percent your employer will match it. To match three thousand dollars and equal three percent, wow!  Even if your balance in your accounts don’t go up, you just made three thousand right? An employer match is a good advantage to a 401K. That’s not always the case. Some employers don’t match your contributions to your 401K. 


In 2023 there will be additional options for catch-up contribution. If over the last few years you haven’t maxed out how much you can put in, you may be able to catch up. As well as, do additional payments to get your 401K balance as high as it could be. Make sure you understand that if you are going to take out money from that 401K prior to your retirement, you need to know what those fees, penalties, and interest payment/tax payments are. A lot of times people take the money out and not realize what kind of tax life ability that triggers. Do you think a 401K is worth it?

Need some advice? Hire one of our experts for a consultation and let us help you make the right choice. Click here to schedule an appointment.


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