Whether you’re just getting started, or you are about to retire, your company 401K is likely the best place to be investing.
This may seem obvious, but there is somewhat of an undercurrent philosophy that says the 401K isn’t where you should be preparing for retirement. For a new investor, this can seem confusing and can lead to analysis paralysis.
The 401K certainly has it’s downside: fewer investment options, single tax strategy (deferring), married to your job, among others. But I think none of these knock it off of the top spot as the best place to invest your money. Here’s several reasons why.
The Choices are Limited – To some this is certainly a negative. I understand. But not enough people are investing. One of the main reasons: too many choices. People are afraid to get started investing because they think they will choose the wrong funds or investments. 401K administrators usually narrow the choices down for you, and I contend this is one of the reasons why the 401K enjoys such high participation rates vs outside plans.
The Large 401K Annual Limit – In 2019 you can contribute $19,000 of tax-deferred dollars to your 401K. That’s head and shoulders above the measly $56000 that the Roth IRA offers. By investing in the 401K, you lessen the chance that you’ll reach your maximum.
No Income Limits – Unlike other tax-advantaged retirement accounts, the 401K has no limitation on the income you can make and still participate. Even your rich CEO can put his $16,500 in the 401K. No matter what you make, you’ll never have to give up contributing to this account.
You Can Usually Get Free Investment Advice – If your HR department played their cards right, they secured education and advisory service from your plan administrator. Whether it be online information or classroom education, you can freely tap into this resource when you invest with a 401K.
The Focus is On Funds – Most 401K’s don’t come with the ability to trade in single stocks. They offer broad funds so that your risk is spread across many investment types and asset classes. Like limiting choice, I understand how some could view this as a bad thing. But for the average investor, this is what they need. Give people control, but not too much control such that they’ll wreck themselves.
You are Automatically Enrolled – Most companies nowadays will just get you going with your 401K when you are hired. So, unless you go out of your way to opt out, you’re in. Getting started is the hardest part of investing. Once you’re doing it, it’s easy to keep going and to get better at it.
Paying Yourself First is a Snap – Finally, once you are enrolled, the 401K contributions are automatically taken out of your paycheck before it hits your bank. You are paying yourself first, and then you’re free to spend the rest. I love it. I wish all investing was so easy.
The wonderful thing about the 401K is that you don’t have to stop there. Start with a 401K with work o get your employer match, and then, if you qualify, start investing with a Roth IRA versus the 401K. You can do both.