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Here's Why You Might Regret Only Having a 401(k) for Retirement

By Maurie Backman - Oct 1, 2021 at 6:18AM

Key Points

  • Many companies offer 401(k) plans.
  • It pays to sign up for a 401(k) when there's an employer match involved.
  • You may not want to keep all of your money in a 401(k) for one big reason.

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While 401(k)s have their benefits, you may want to put some of your savings elsewhere.

Though not everyone has access to a 401(k) plan, if you are offered one at work, it pays to sign up. These employer-sponsored plans come with a couple of key benefits.

First, 401(k)s come with higher annual contribution limits than IRAs. Currently, these plans max out at $19,500 a year for savers under the age of 50 and $26,000 a year for those 50 and over. IRAs, by contrast, max out at $6,000 a year for those under 50 and $7,000 for workers 50 and over.

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Also, many companies that sponsor 401(k)s also match worker contributions to some degree. The result? Free cash for retirement and a nice boost in savings.

But while there are definite advantages to having a 401(k), you may not want it to be your only retirement savings plan for one key reason.

It's all about choices

If there's one notable drawback associated with 401(k)s, it's that these plans generally don't allow you to buy individual stocks. Rather, you'll be limited to different funds -- actively managed mutual funds, target date funds, and index funds.

To be clear, you can do quite well for yourself investing in these funds. But no matter what funds you choose for your 401(k), you ultimately don't get a say in what goes into them. And if you want more control over your long-term investments, you'll need to house some of your retirement savings in an IRA.

IRAs allow you to buy individual stocks for retirement. If you're good at researching companies, that's an option worth pursuing.

Not only might an IRA allow you to assemble a mix of stocks that better align with your risk tolerance and goals, but it might also help you keep your investment fees to a minimum. Actively managed mutual funds and target date funds are notorious for charging high fees, which can eat away at your returns -- even if those funds perform fairly well.

Another thing you should realize about your 401(k) is that on top of your investment fees (which you can control to some degree -- namely, by opting for index funds, which charge less than their actively managed counterparts), you'll be on the hook for administrative fees. Those, too, could eat into your returns more so than the fees you'll be hit with if you open an IRA.

Finally, when you save in a 401(k), you're generally stuck with the plan your company offers -- whether you like it or not. With an IRA, you get to choose which account to open and the financial institution to open it with. You can even open an IRA online for maximum convenience.

It pays to branch out

If you're offered a 401(k) plan through your job, it pays to contribute enough money to that account to snag your full employer match. But from there, you may want to consider putting some of your retirement savings into an IRA. Doing so will ultimately give you more control over your money, which could put you in a stronger position to retire comfortably when you're ready.

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