By Brian Bloxom, ChFEBCSM
Most of us know that planning for retirement is a critical part of stabilizing your financial future. In the United States, one of the most popular ways to save for retirement is through a 401(k) plan. This option allows you to place your hard-earned money into an investment account, either before or after taxes are taken out. Many experts state it’s a good idea to put as much as you can into your 401(k) because of the tax advantages—but is this right for everyone?
The facts show that this might not always be the best move. Read on to understand why.
You May Have Other Financial Priorities
While saving for retirement is important, it’s not the only financial goal you may have. For example, you may be saving for a down payment on a home, paying off debt, or building up an emergency fund. If you funnel all your extra money into your 401(k), these other areas of your finances may end up neglected. Make sure you have a well-rounded financial plan that addresses all your priorities. To start, consider the following to help you assess other potential goals:
- Pay down any high-interest credit card debt.
- Build up an emergency fund with 3-6 months’ worth of living expenses.
- Make sure you have adequate health insurance.
- Review your estate plan: do you have a basic will or trust in place to safeguard your loved ones in your absence?
- Consider disability insurance in case an accident or injury prevents you from working for an extended period of time.
- If you are married or have dependent children, consider obtaining adequate life insurance.
You May Have Access to Better Investment Options Elsewhere
Most 401(k) plans offer a limited selection of investment options, which may not be the best fit for your strategy. Suppose you have other investment accounts, such as an IRA or taxable brokerage account. In that case, you may have access to a wider variety of investment options.
For example, let’s say your 401(k) plan only offers mutual funds but you’re interested in investing in individual stocks or exchange-traded funds (ETFs). In this case, an IRA or taxable brokerage account may be the better option. By diversifying your investments across multiple accounts, you can improve your returns and invest in the right mix of assets for your financial goals.
You May Want More Flexibility in Accessing Your Money
Contributions to a traditional 401(k) are tax-deductible, but withdrawals in retirement are taxed as income. Withdrawals prior to age 59.5 are subject to tax and a 10% penalty if you don’t meet the strict criteria for a hardship withdrawal. If you’re planning to retire early or have other income streams in retirement, you may want more flexibility in accessing your money. Roth IRAs, for example, allow you to withdraw your contributions at any time without penalty, and qualified withdrawals of earnings are tax-free. Consider whether a Roth IRA or other investment vehicle might give you more flexibility both now and in retirement.
You May Pay Less in Fees With Other Investment Accounts
When considering whether to max out your 401(k) contributions, it’s also important to take into account the fees associated with these plans. Though 401(k) plans are convenient, they can also be expensive, with costs including administrative fees, investment fees, and expense ratios, among others. These fees can eat into your investment returns over time and can be especially costly if you’re not paying attention to them. Make sure you understand the fees associated with your 401(k) plan and consider whether there are lower-cost investment options available to you. It’s worth seeking the advice of a financial advisor to help you navigate these fees to help you get the most bang for your buck.
If You Do Max Out Your 401(k), Know Your Limits
If you choose to max out your 401(k), it’s important to know your contribution limits. For 2023, you can defer as much as $22,500 into your 401(k). An additional $7,500 in catch-up contributions is allowed for those over 50.
One of the best parts of a 401(k) plan is that many employers offer matching contributions. The most common matching formula is 50% of employee contributions up to 6% of salary. This means your employer will contribute a maximum of 3% of your salary if you contribute 6%. Since employer matches are essentially free money and not considered income in the year received, it’s generally advised to contribute at least enough to get the maximum matching contribution, even if you don’t max out the full contribution amount.
Determine the Right Choice for You
Although contributing the maximum amount to your 401(k) can be a wise decision in some situations, it may not be the best move for everyone. At Sentinel Wealth Partners, we’re here to guide you toward the best choice that fits your specific retirement plan. We invite you to take the next step by reaching out to us today; call our office at 703-832-0164, send an email to [email protected], or use our online calendar.
About Brian
Brian Bloxom is an Independent Financial Advisor, Chartered Federal Employee Benefits ConsultantSM (ChFEBCSM) and Chartered Retirement Planning Counselor℠, CRPC® professional with 25 years of experience in financial advising. He founded Sentinel Wealth Partners to serve retirees, individuals approaching retirement, and individuals managing complex retirement plans such as company plans or federal benefits plans. His expertise and dedication to helping his clients achieve their goals make him a trusted resource that will help you feel confident in your customized retirement plan. Brian’s mission is to be available to his clients—all the time. He’s here to solve your problems, relieve your anxiety, and give you optimism for retirement. Because ultimately, your retirement should be about well-deserved enjoyment, and not about stress or anxiety. When he’s not working, you can find Brian spending time with his wife, Jessica, and their two sons, Spencer and Preston. He enjoys coaching soccer, serving in his community, golfing, and relaxing at his vacation home at Lake Anna, VA. To learn more about Brian, connect with him on LinkedIn.
Disclosure
“Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Sentinel Wealth Partners and Cambridge are not affiliated. Sentinel Wealth Partners is not engaged in the securities business. Cambridge does not offer tax or legal advice.”