Why should I participate in employer-matched 401k with all of the government restrictions on it?

Question

I understand the tax interest growth tax free idea, but that seems relatively insignificant to me. My employer matches my 401k, so I see the value of free money, but I don't want to be controlled by government, especially if I can retire earlier than 59.5 y.o. without this plan. Why should I feel good about doing the 401k plan, when many other investment routes give me much more control (from 6 month to 7 year commitments in a wide variety of plans) over my retirement?

Answer 1

Because the matching is a guanteed one year return on whatever portion they will do matching on. If the matching is 100% matching up to a certain point, you will never be able to do better than that on any other investment, unless you are lottery-winner type lucky.

If you are concerned about freedom, remember that you can always max out your matching and then put whatever is left in your investing budget into more flexible options.

You will not use all of your money all at once when you retire, so if you want to retire earlier than the government will let you withdraw from the 401k without penalty, draw from your flexible funds first, and then the 401k later when you reach an age where taking money out is not restricted as much.

There is also the possibility of rolling over that 401k into something more flexible somewhere down the road after you have locked in the matching contributions.

Answer 2

The pros are that a "employer-match" is free money. It does reduce your taxable earnings. And right now the market is strong and most 401Ks are producing 10-15% returns and HIGHER.

The cons are if you die are the age of 59 or younger, you never get to enjoy this money. Also, the market could take a drop and potentially lose you money.

My suggestion is to balance your retirement nest egg into several places. 1) Start with the 401K and at least contribute up to what your employer will match. 2) Start an IRA and if you qualify, a ROTH IRA. This is an investment fund where the government never touches the interest unlike th 401K. And 3) open a mutual fund or two with a local broker. These funds will have generally good growth and you don't have to wait till you are 59 1/2 to enjoy this money. You can cash them in at anytime.

Balance your retirement fund and you will be relaxing with cool million when you get ready to retire. Good luck!

Answer 3

A lot of benefits have been stated here, Keep in mind a couple of Key points however. The reason there are so many stipulations is because this is a retirement plan, designed to help you save for retirement, if you want more access to the money then you should also have a savings account for after tax monies. This plan is governed by ERISA which protects your money, as well as restricting it so keep this in mind. One other important key point, is that there is an exclusion to the 10 percent early withdrawal penalty that states if you withdraw the money during or after the year that you attained age 55 you would not be subject to the additional 10 percent early withdrawal penalty.

Answer 4

Everyone has added all the value you need...here's my two sense.

They're not restrictions, they're controls and conditions -- to ensure the money is kept clean..to allow you the tax advantages the govt has promised you and all 401k people.

You can open a cash business or two...if you choose not to claim it on your taxes..you will not pay taxes on it right? -- well imagine that you have 1mil or 500k sitting under your mattress or in your vault in your basement. -- tell me how much it has grown since you put it in there? How much has the cost of living (gas, milk, taxes, insurance, etc) gone up in the time you've saved up the dough?

Now that you stare at your 1mil to 500k ...its no longer worth what it use to be when you started investing today. -- and guess who is going to inquire about your 1mil to 500k contribution/investment into your brokerage account or 401k account --when you try to let it earn 5% interest...or even more? Yup the IRS...guess what they'll ask you? Where did you get it... :)

So put the max in -- and or put the max contribution your company makes to get that free dough..and more importantly get some good 401k investment choices to make your dough grow over the years. Social security and pensions won't exist in another 20years.

Answer 5

Do the math. The tax-free growth is worth a lot, due to compounding, even though you do pay tax when you actually take it out.

If you're hoping to retire before 59-1/2, I assume you'd have other savings also. Live off those until 59-1/2 when you can take 401K money out without penalty.

Answer 6

Eat up all the tax benefits and free money that you can. If you want to retire early, you'd need to max that 401k and do a ton out non-qualified investing anyway. Do both, if that's your plan.

Answer 7

I agree..401Ks are soo important nowadays esp b/c we won't be getting much of anything from social security. Still save money in other types of accounts, such as money market or high yield savings, and use that money if u retire early. Plus, the other good thing about 401Ks are that the money comes directly outta ur check..u don't have to move it to another acct on your own, that way it doesn't even feel like ur actually saving the money. :o)

Answer 8

Matching funds can not beat that. sine you are a saver or give the impression that you have other things going the 401k is not you one and only plan to retire, just use this as one leg of your retirement plane. Look at when you fund to be matched are maxed out then divert the rest to other things.

Answer 9

There is a old saying from my days as a financial planner, "It's not timing the market, It's time in the market!" A deliberate and regular investment into your company matched 401k is the best way to save money. At least do your company match, then if you want to save elsewhere, do it. Remember it's a marathon not a sprint.

Answer 10

Unless you're a financial genius, you're not going to beat the return of a company matched 401k. Also, just think of it as money you'll use when you do reach that age, for the shorter term you should have additional money invested anyway.