You should expect to need savings on top of Social Security once your retirement kicks off. But you have options when it comes to choosing a home for your nest egg. Those might include a traditional IRA, a Roth IRA, or a traditional 401(k) plan offered by your employer.
These days, though, a growing number of 401(k) plans are including a Roth savings feature. And that's an option you may be tempted to take advantage of -- especially this year because Roth 401(k)s are no longer forcing savers to take required minimum distributions.
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While a Roth 401(k) might seem like a great home for your retirement savings, there are certain pitfalls you might encounter if you choose one of these accounts. Here are three reasons you may not want a Roth 401(k) to serve as your nest egg's home.
1. You have limited investment choices
The nice thing about saving for retirement in an IRA is that you get a world of investment options to choose from. Want to load up on individual stocks you research yourself? Go for it.
With a 401(k), you're generally limited to several different funds. Within that realm, some funds may come with lower expense ratios than others. Either way, you'll still be limited as to how you invest your retirement savings, so an IRA may be a better bet.
If you want the benefit of tax-free investment gains and withdrawals, you can always choose the Roth version of an IRA. Even if your income is too high for a Roth, there's always the conversion option.
2. Your plan fees are high
The investments you choose for your 401(k) could leave you paying a lot of money in fees. But even if you opt for low-cost investments, like index funds, you might still get hit with fees associated with administering your 401(k).
Those fees, like investment-specific fees, could eat away at your returns over time. With an IRA, your fees may be lower.
3. There's no employer match
Contributing to a 401(k) plan makes sense when there are employer-matching dollars to take advantage of. Data from Vanguard finds that within its platform, 95% of retirement plans come with some type of matching contribution on the part of a sponsoring employer.
But if you're in that unlucky 5%, it may not be worth it to contribute to a Roth 401(k) if the above circumstances apply to you. If there's no workplace match, you may want to max out an IRA first. Then, if you wish to contribute beyond that point, you can divert extra funds to a Roth 401(k).
You may also want to keep some of your retirement savings outside a tax-advantaged account. That way, your money will be completely unrestricted.
Roth 401(k)s give you many of the benefits of Roth IRAs but with higher contribution limits. As you can see, however, there are drawbacks to making a Roth 401(k) the home for your retirement savings, so you may want to consider a different solution.
