Podcast Episode 372: 401(k)s Aren’t Perfect

It might seem a bit counterintuitive to hear reasons why you shouldn’t be putting money into your 401(k), but there are times when it makes more sense to allocate that money elsewhere. In our latest episode of the Money Wisdom podcast, Jake Doser, CFP®, CPWA® will explore scenarios where a 401(k) might not be the optimal choice.

Let’s start with one of the main reasons why you’d want to hold off on your 401(k) contributions and that’s because you don’t have an emergency fund in place. Without this financial safety net, you might find yourself dipping into your 401(k) for unexpected expenses, which can lead to penalties and taxes. People will often have healthy retirement accounts with zero ready for unexpected expenses, and this happens at all ages. Building an emergency fund should be the first financial objective before contributing to a 401(k).

Another critical factor to consider is high-interest debt. If you have outstanding balances on credit cards or personal loans with interest rates higher than 5-6%, it might be wiser to focus on paying off this debt before putting money into a 401(k). High-interest debt can quickly erode your financial stability, making it crucial to tackle it head-on.

The next reason Jake talks about is an employer match in your 401(k). While an employer match can significantly boost your retirement savings, not all employers offer this benefit. If your employer doesn’t match your contributions, it might be worth exploring other investment options, such as a Roth IRA, which could offer lower fees and more flexibility.

Another reason why you might prioritize a Roth IRA over the 401(k) is if tax planning is important to you.. Unlike traditional 401(k)s, Roth IRAs are funded with after-tax dollars, meaning you won’t owe taxes on withdrawals in retirement. This can be particularly advantageous if you expect your tax rate to be higher in the future or if you plan to leave the money to your heirs.

The last thing we’ll add to this list is what to do what to do with your 401(k) if you leave your job. Keeping your money in your former employer’s plan can lead to complications, such as changes in fees or investment options. It’s often recommended to roll over your 401(k) into an IRA to maintain control and access to a broader range of investment choices.

To sum up, while 401(k)s are a popular retirement savings vehicle, they are not always the best choice for everyone. Factors like emergency funds, high-interest debt, employer matches, and tax considerations all play a crucial role in determining the best financial strategy for you.

For more detailed guidance, consider getting a copy of The Ultimate 401(k) Guide from Johnson Brunetti. Whether you’re just starting out or re-evaluating your retirement strategy, this resource can provide valuable insights to help you make informed decisions.

Here’s some of what we discuss in this episode:

• Build up your emergency fund before you focus on locking money away in a retirement account.

• How are you addressing each potential financial pitfall and doing it in a healthy, holistic way?

• If your employer doesn’t match your 401(k), you might have better investment options outside of it.

• Future tax rates might make you rethink tax-deferred contributions.

• Why you might not want to leave money in a 401(k) when you change employers.