Should I Use a 401k or Invest in Stocks Myself?

September 16, 2020

Whether it's for retirement or planning for unforeseen costs like medical expenses, thinking ahead and saving money is always a smart idea. But what is the smartest way of saving? Should you take advantage of your employer's 401(k) retirement plan? Or should you strike out on your own and pave your path to future financial security by investing in stocks yourself? If you've wondered this, then you're in the right place.

The Case for Using a 401(k)

  • Tax benefits - The biggest benefit of investing in a 401(k) is that the money you invest is tax-deferred. You don't pay income tax on this money until you withdraw when you are just shy of 60.

  • Matching - Many companies will match your contribution to a percentage of your salary. This is essentially free money and can help grow your retirement fund faster. Not all companies offer a match, but even without it, a 401(k) can be attractive often. Why? Because providers have a legal responsibility to operate in the best interests of the employees. This typically means reasonable feeds and a diverse range of investment options.

  • Fund selection - Many employers offer a wide range of funds to choose from, from reputable financial institutions. This can give you some freedom and control over your investment.

The Case for Investing Yourself

Many people find investing in a 401(k) frustrating because they have limited control over how and where their money is invested. Some employers offer more flexibility on this front, but it's often still limited. Additionally, if you want to withdraw your money early (before you each 59½), you will face financial penalties. 

You're also limited by how much you can invest per year with a 401(k). In 2020, the basic limit on employee contributions stands at $19,500 for regular contributors and $26,000 for those over 50 taking advantage of the catch-up scheme.

A Word of Warning

There are countless blogs online from millionaires recommending that you don't invest in a 401(k). Millionaire Grant Cardone, author of "Be Obsessed Or Be Average", argues that you should focus on "earning not saving". The issue with statements like this is that they are grounded in confirmation bias. Put simply, no matter which route you take to financial stability, you're likely to consider it the right one if you are successful. Be wary of following someone else's blueprint for financial success and instead focus on what makes the most sense for your financial situation.

What's the Verdict?

Investing in a 401(k) is generally a good idea due to the substantial tax benefits that come with it. However, not all 401(k) plans are created equal. If your employer offers a particularly unimpressive plan and you have your own ambitions for stock investment, then you might benefit from investing yourself. If you’re considering this option, it’s still important to remember that your employer has a legal requirement to act in your best interests when it comes to your 401(k), and you are not offered the same protection with personal stock investment. Of course, nothing is stopping you from doing both. After all, investing isn't a zero-sum game - if you invest in a 401(k), you don't lose the opportunity to invest in stocks yourself, and vice versa.

Rahul Iyer

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