If you have access to a 401(k) plan, it means you actually have multiple options when it comes to saving for retirement. If you’re eligible for a 401(k), it means you work for an employer and therefore earn income. And anyone with earned income can contribute to an IRA.
You can also contribute to a taxable brokerage account regardless of where the money comes from. If you receive a $50,000 inheritance, you could choose to put all of that money into stocks in the hopes of seeing it grow.
However, if you’re entitled to participate in a 401(k), it’s something it could really pay to do. Many employers that sponsor 401(k) plans also match worker contributions to some degree. So contributing $3,000 from your paycheck, for example, might set you up with another $3,000 from your employer. And it pretty much always pays to claim your match in full by contributing enough from your earnings to get it.
That said, it may not be a good idea to put all of your retirement savings into a 401(k). Here’s why
You may want to retire early
Early retirement is something a lot of people think about but assume isn’t possible. However, you never know to what extent your investments might grow, allowing you to wrap up your career at an earlier age than planned.
The problem with having all of your retirement savings in a 401(k) is that you’ll generally face a costly early withdrawal penalty for taking distributions prior to age 59 1/2. So if you want the option to retire at, say, age 52, then you’ll need to keep some of your long-term savings outside of a tax-advantaged account.
You may want more investment options
One major drawback of 401(k)s is that they typically not do allow you to invest in individual stocks. This can be problematic for a couple of reasons.
First, if you can’t build your own stock portfolio, you give up control over your investments to some degree. Sure, you could choose one specific mutual fund over another in your 401(k). But you don’t get to dictate what assets those funds actually invest in.
Secondly, certain types of 401(k) funds are notorious for charging costly fees. Target date funds and mutual funds commonly fall into this category.
You can potentially get around those big fees by favoring index funds in your 401(k). Those tend to be low-cost because they’re passively managed. But all told, an IRA gives you a lot more control over your assets in the context of a tax-advantaged retirement plan.
Choose a home for your savings carefully
There’s nothing wrong with housing some of your retirement savings in a 401(k). And again, if there’s free money coming your way in that account, then it pays to snag all of it. But beyond your match, you may want to find another home for your money so you’re not limited in your investment choices or forced to wait until you’re almost 60 to start enjoying your money.