What is a 401k?
The 401k is an awesome investment opportunity for retirement. It allows you to defer paying income taxes on any money that you place into this account up to $18,500.00 in 2018. If you are over 50, you may also contribute an additional $6,000.00 as catch up.
There is another benefit that really makes this investment worthwhile. Most employers will match up to a certain percentage of your salary towards your investment. Therefore, this basically becomes free money that you definitely shouldn’t pass up. Let’s consider that you are investing 10% of your salary towards your 401k and your employer is match 5%. You now have a 50% gain right out of the gate. You won’t see that sort of return on your outside investments. At the very least you should invest the amount that your employer is willing to match. This will guarantee that you are maximizing your investment.
Who benefits the most from the 401k Investment
The person that benefits the most out of their 401k investment is those that will be in a lower tax bracket at the time they begin receiving their disbursements. This means if you are currently in a 32% tax bracket and will be in a 28% tax bracket when you retire, then it is best to pay the taxes later. If you feel you will be in the same tax bracket, there may be no reason to invest anymore then what your employer is willing to match.
Index Fund versus 401k
After we invest the maximum matched contribution, we may want to consider investing the rest into an Index Fund. If we look at the average return rates for a 401k compared to a broad-based index fund, we wind the average index fund almost doubled the 401k in performance. Therefore, we really need to look at everything before we put all of our eggs in the 401k basket.
Hidden 401k Fees
One thing that most people don’t consider when investing in their 401k are the numerous fees. Most plans include a Plan Administration Fee, Management Fees, and various other service fees. They can really add up and most don’t even realize they are there.
I suggest you take the time to review your 401k and determine exactly what your returns are including all of the fees. Take that amount and compare it to other investment types to get a true indicator of what is in your best interest as an investor.