October 8, 2020
By Rahul Iyer
There are many financial gurus out there who speak negatively of 401(k)s. They often share that it is a waste of time. This advice must be considered carefully because there are several benefits that come with a 401(k) that make it a great retirement investment plan. Some are opting to invest their money on their own as opposed to settling with the limited investment options offered by the typical 401(k) retirement plan.
The benefits of a 401(k) plan include tax benefits and employer matching. The tax benefits of 401(k) plans are incredible. The primary drawback is that you will not have access to your funds before 59 ½ without facing a penalty. Another great reason for contributing to a 401(k) plan is the employer matching feature that is prominent with most 401(k) managers. Employers typically contribute a percentage of your monthly contribution to your 401(k). This is free money. By investing on your own, you will not be able to tap into these benefits.
The capital gains of a 401(k) investment do not face tax until the time of withdrawal. This delay in taxation gives your money time to grow without the burden of taxes. This results in greater earnings of time. As mentioned earlier, you also get the added benefit of an employer matching your contributions when you invest in a 401(k) plan.
One of the main drawbacks of the 401(k) option is that you cannot touch your money at will until you have passed 59 ½. If you do so, you will face income tax along with a 10% penalty. There are cases where you can touch your funds without these penalties, but the fact remains that you cannot simply touch the funds whenever you feel like it. In the case of a 401(k) plan, your investment options are limited to what your employer offers. The options generally include mutual funds and select stocks.
Without a doubt, the majority of us have financial goes that go beyond the realm of retirement. You may want to raise funds for a down payment on a house, cover college tuition among other things. Our needs make personal investing much more attractive. When you invest on your own, the funds in your investment is typically accessible. You also get the privilege of investing in whatever you want.
While the freedom to choose and direct your funds to whatever you like is a major advantage of personal investing, there are also drawbacks. Personal investing will expose you to taxes. You will have to pay taxes on the dividends you receive as well as on your capital gains. You also face the risk of losing all your hard-earned money if your skills are not up to par.
Unless you are ready to spend the time and learn the ins and outs of investing, a 401(k) may just be the best option for you. If you have maxed out your 401(k) plan, you could consider taking on safer investments such as index funds.