There are a few different benefits to saving for retirement in a 401(k) scheme. For one thing, those contributions are deducted from your paychecks automatically, and it’s hard to beat that convenience. It also means that you may be more likely to stay on track with your retirement savings goal since your 401(k) is getting funded on autopilot.
Another big perk associated with 401(k) plans is getting an employer match. It’s pretty common practice for companies that sponsor 401(k)s to match worker contributions to some degree.
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But what if your employer offers a 401(k) without any sort of matching incentive whatsoever? Does it still make sense to put money into that account?
The short answer is yes, it could still very much pay to take part in that 401(k). Here’s why.
You still get the tax benefits
The money you put into a traditional 401(k) goes in on a pre-tax basis. So the more money you contribute to your employer’s retirement scheme, up to the annual limit, the more income you can shield from the IRS — legally, of course.
Furthermore, when you invest in a regular brokerage account and you sell investments at a profit, you’re required to pay taxes on those capital gains year after year. With a traditional 401(k), investment gains are tax-deferred, so you don’t have to deal with taxes until you take withdrawals later in life.
Now Roth 401(k)s work differently from a tax perspective. With a Roth 401(k), you won’t get an up-front tax break on the money you put into your account.
However, investment gains in a Roth 401(k) are tax-free. Withdrawals are also tax-free, which means you don’t have to worry about the IRS taking a piece of your retirement income.
An IRA could make more sense
Clearly, there’s still an argument to fund a 401(k) even if there’s no employer match to relish. But if your company’s 401(k) charges exceptionally high fees and you’re not happy with the investment options that are being offered to you, then you may want to put your retirement savings into an IRA instead.
One major different between 401(k)s and IRAs is that with the former, you’re generally limited to a bunch of different funds to invest in. With an IRA, you get the choice to invest in individual stocks. That could help you not only minimize your investment fees, but assemble a portfolio you feel is conducive to meeting your long-term savings goal.
Plus, with a 401(k), you don’t really get to shop around. If you want to take part in one, you have to go with your company’s scheme. With an IRA, you can differentiate different providers to see where fees are the lowest.
It’s definitely disappointing to not be privy to an employer match in your 401(k). You don’t need to write off a 401(k) just because that’s the case. But if there are elements of your employer’s scheme you just aren’t thrilled with, then it definitely pays to examine your options for housing your retirement savings in an IRA instead.
