I Used to Think a 401(k) Was the Best Retirement Savings Tool. But Here Are 4 Issues to Know About.

When I first started working full-time, I didn't have access to a 401(k) through my job, and that annoyed me.

Sure, I was able to save for retirement in an IRA instead. But I had to actively fund that IRA myself, whereas with 401(k)s, contributions are taken as payroll deductions.

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Plus, not having access to a 401(k) plan meant no workplace match. So that felt like a huge disadvantage (though to be fair, subsequent jobs I had offered 401(k)s, but there was no match available in any of those plans).

While I used to wish for a 401(k), I'm no longer convinced it's the best retirement savings tool out there. Here's why you may want to look elsewhere.

1. High fees can reduce returns

Many 401(k) plans include costly administrative fees that can eat away at your returns. Those aren't fees you can control.

If your 401(k) charges administrative fees above 1%, you may want to consider only contributing enough to your workplace plan to get your match. Beyond that, an IRA could be less expensive.

2. Investment choices can be limited

With a 401(k), you're generally limited to a variety of investment funds. If your 401(k) has a good selection of low-cost index funds, you may be in good shape. If not, you may be looking at hefty investment fees.

IRAs have a huge benefit over 401(k)s in this regard. They allow you to hold individual stocks, which could help you limit your costs and also assemble a portfolio that better aligns with your strategy and goals.

3. Your money is restricted until age 59 1/2

With a traditional 401(k), you get a tax break on the money you contribute up to the annual limit. But in return, the IRS expects you to reserve that money for retirement.

If you take a 401(k) withdrawal before age 59 1/2, you risk a 10% penalty on that sum. That's a tough blow, considering that it's your money.

An IRA won't solve this problem, but a taxable brokerage account could. It pays to fund one of these accounts if you anticipate being able to retire early and want access to your money at a younger age.

4. You'll be forced to take withdrawals eventually

If you have a traditional 401(k), you'll eventually have to take required minimum distributions (RMDs). While you don't have to spend those mandatory withdrawals, you do have to pay taxes on them.

This is another reason to keep some of your long-term savings in a taxable brokerage account. There's no such thing as RMDs in that world.

While 401(k)s have plenty of benefits, I'm no longer sold on them being the ideal retirement savings plan. If anything, I think it pays to fund a 401(k) up to your workplace match. But you may want to consider putting the rest of your savings elsewhere, so you get more flexibility on investment choices and withdrawals.

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