If your employer offers a workplace 401(k), you have a choice to make when it comes to your retirement accounts.
You can invest only in that 401(k) and focus all your retirement planning efforts on it. Or you could put enough money in the 401(k) to earn the maximum employer match and then invest elsewhere, such as in an individual retirement account (IRA).
There are pros and cons to both approaches. Consider these three big reasons why you should stick with your 401(k) alone -- along with two reasons why you may prefer to diversify the retirement investing accounts you use.
Three reasons to invest only in your 401(k)
Here's why it could make sense to stick to investing in your 401(k) alone.
- Your money will be all in one place: It can be easier to track your progress toward your retirement goals when all of your funds are in one account rather than spread across several. Keeping track of your asset allocation can also be easier, which reduces the chances your portfolio will become unbalanced and you'll be exposed to too much risk.
- Investing in a 401(k) is convenient: After you sign up for automatic contributions to your 401(k), investing is virtually effortless. Your employer will withdraw the chosen amount from your paycheck and deposit it automatically into your account, where it's generally invested based on your pre-selected asset allocation. You don't need to worry about moving money into an IRA and manually investing it.
- You may make safer investment choices: 401(k) accounts usually limit you to investing in a small number of different assets. Most of the time, the investments available are pretty safe because they are index funds or target date funds that give you broad exposure to a large pool of investments.
Two reasons to branch out to other retirement accounts
On the other hand, here are two reasons you may want to diversify and invest in other types of tax-advantaged retirement accounts as well.
- It's difficult to beat the market with 401(k) investments: The flip side of the limited investment pool that 401(k) accounts offer is that it can be really difficult to beat the market by much. That's because most 401(k)s don't allow you to invest in individual stocks. Outperforming the market usually can't happen when you're investing in index funds or target date funds since so many different investments would have to beat average market returns.
- Your investing costs could be higher: Sometimes, 401(k)s have high administration fees. Or the investments available may have a high expense ratio. If your only investment options are costly ones, you'll end up with a smaller portfolio balance than if you'd put some money into cheaper investments accessible in an IRA.
Ultimately, you'll need to consider the specifics of your 401(k) account and the investments available, and you'll also need to assess your investing style to make the decision about which approach is better for you. The good news is, whatever option you choose, investing for retirement is a smart financial move likely to pay off in the end.