401(k)s have gotten some negative press due to the market downturn during the recession, which took a big toll financially on many employees. Even so, as someone who has dedicated my whole working life to retirement planning, specifically to the 401(k), I wanted to share six important points on why 401(k) are still a better vehicle for saving for retirement.
- The matching contribution. The vast majority of companies who sponsor 401(k) plans match your contribution into the plan. You can’t get that with any other savings vehicle. For example if you’re going to put money into an IRA nobody is going to come in and give you $0.50 for every dollar that you put into that IRA.
- These are professionally managed plans that you would otherwise have pay for. By that I mean that the plan sponsor themselves hire professionals to assist them in evaluating the 6,000-9,000 mutual funds that are available to them to find the best ones that they think fit with what they are trying to do in that 401(k) plan.
- The payroll deduction. This is really important because it makes it an almost painless way to save. Every paycheck a certain amount of money that you want to go to your 401(k) is going to get deducted from your paycheck. In addition, these deductions are before taxes so the amount that you put into that 401(k) is tax deferred.
- The portability. Now, IRAs certainly are portable; lots of different ways to save for retirement are portable, but, 401(k)s are more so. If you decide to leave your existing employer: you can roll it into a new 401(k) plan at your new employer, you can leave it in that old 401(k) plan, or you can move it into an IRA.
- The huge contribution limits that are on 401(k) plans. These aren’t matched by any other type of vehicle. For example, in this year you can contribute up to $16,500 into a 401(k) plan. Also, if you are 50 years of age or older you can contribute an additional $5,500 a year into the plan. You can’t touch that with an IRA.
- Good access to the funds in case of an emergency. This usually comes from 401(k) loans or hardship withdrawals. If you run into some tough times or you have an emergency in the family, there’s a way for you to access that money.
So, those are usually the six items that I think distinguish the 401(k) plan and make it one of the best ways to save for retirement.