3 Reasons to Invest for Retirement Outside of a 401(k)

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KEY POINTS

  • Many people use a 401(k) as their only retirement investment account.
  • There are other tax-advantaged retirement plans available.
  • It may make sense to invest some of your retirement outside of your 401(k).

Could other accounts provide you with better benefits?

If your employer provides a workplace retirement plan, chances are good it's a 401(k).

These popular tax-advantaged accounts allow employees to make pre-tax contributions and employers to match some of the money workers put in. They make investing quick and easy, as workers can just have their withdrawals taken right from paychecks and will usually have a limited pool of potential investments to choose from.

For those whose companies provide access to a 401(k), investing enough in it to earn any available employer match should be a top priority. That's because employer matching funds are free money and provide a guaranteed return on investment that's not available elsewhere.

But once you've earned the employer match, there are some serious reasons to consider putting the rest of your retirement money into a different kind of tax-advantaged retirement plan. Here are three big benefits of choosing an outside account for at least some of your retirement investing.

1. You can choose an account offering different tax advantages

In many workplaces, a traditional 401(k) is your only option. With this type of account, you get a tax break upfront in the year you invest money in your retirement plan, but all withdrawals are taxed at your ordinary income tax rate.

If you invest your money elsewhere, though, you can choose a retirement plan that provides different tax breaks. For example, if you invest in a Roth IRA, you won't be able to take a deduction for contributions, so there's no upfront tax savings. You will, however, get to take tax-free withdrawals. If you think there's a chance you might be in a higher tax bracket later in retirement -- when you'd have to pay taxes on money you take from traditional accounts -- it can make a lot of sense to hedge your bets by putting at least some money into a Roth IRA.

2. You can gain access to a wider choice of investments

If you're putting all your money into a 401(k), your only options for retirement investing will be the ones your 401(k) administrator allows.

This is usually a mix of different mutual funds, ETFs, or target date funds. You probably aren't going to be able to invest in individual companies. And some, or all, of the investments available to you may have higher expense ratios, depending on your 401(k) plan.

If you invest some of your retirement funds outside of your 401(k), though, you can use a brokerage firm of your choosing to open your retirement plan. You'll have access to all the investments the brokerage firm permits. This could include shares of individual companies, more low-cost mutual funds or ETFs, and perhaps even alternative investments such as cryptocurrencies.

This allows you more control over what you invest in and could potentially make it possible to earn better returns.

3. You may be able to avoid required minimum distributions

Finally, workplace 401(k)s are subject to IRS rules that require you to begin making mandatory withdrawals after age 72. These are called required minimum distributions, and the purpose of them is to make sure you eventually pay taxes on invested funds.

If you aren't interested in having to take out a lot of money on a set schedule determined by the government, then you may prefer to put some retirement money in an account that doesn't require RMDs, such as a Roth IRA.

For all of these reasons, it is absolutely worth considering other retirement accounts beyond a 401(k) as you invest for your future.

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