For most people, the workplace retirement plan offered by their company will be a 401(k) (k).
Employees can make pre-tax contributions to these well-liked tax-advantaged accounts, and their employers will often match such donations dollar for dollar. Investing in these funds is quick and simple because employees can have their withdrawals deducted directly from their paychecks. However, the pool of available assets is typically quite small.
Those who have access to a 401(k) plan at work should make sure to contribute enough to take advantage of any employer match. Due to the guaranteed return on investment provided by employer matching funds, they are an attractive alternative to other types of investment funds.
It’s a good idea to deposit some of your retirement savings in a different tax-advantaged retirement plan once you’ve gotten the company match. Here are three huge advantages to at least some of your retirement investing in an outside account.
You have the option of selecting an account that provides various tax advantages.
Traditional 401(k) plans are the only choice available in many workplaces. This form of account gives you a tax credit in the year you invest in your retirement plan, but all withdrawals are taxed at your regular income level.
However, if you opt to place your money in another retirement plan, you will be able to take advantage of different tax benefits. A Roth IRA, for example, does not allow you to deduct contributions, so there is no immediate tax benefit. Tax-free withdrawals, on the other hand, are a given. Investing a portion of your pre-tax income in a Roth IRA can be a smart move if you expect to be in a higher tax rate in retirement and would otherwise have to pay taxes on the money you withdraw from traditional accounts.
You’ll be able to choose from a broader range of investing options.
As a 401(k) participant, you’ll only be able to invest in the options your 401(k) administrator authorises.
There are several different mutual funds, ETFs, and target date funds that can be used in this strategy. Individual companies are unlikely to be an option for you to invest in. Additionally, some or all of the products you can choose from have greater expense ratios based on your 401(k).
A brokerage firm of your choice can be used to open your retirement plan if you decide to place some of your retirement assets outside of your 401(k). Investing options will be available to you as long as the brokerage firm allows them. Alternative investments such as cryptocurrencies, low-cost mutual funds, and ETFs might all fit under this category.
This gives you more control over your investments, which could lead to higher profits.
You may be able to avoid minimum distributions if you have a large nest egg.
Finally, if you are over the age of 72, you must begin taking obligatory distributions from your employer-sponsored 401(k). Required minimum distributions, or RMDs, are a way to ensure that you pay taxes on the money you’ve invested.
If you don’t want to have to take out a large sum of money on a regular basis according to a timetable set by the government, you may want to consider a Roth IRA as a place to stash part of your retirement funds.
As you plan for your financial future, keep in mind that a 401(k) is only one option for retirement savings.
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