Should You Save More Than The Match in Your 401k?
It’s abundantly clear that 401k plans have benefited millions of people and have become the most popular retirement plan since its introduction in 1978. If you are lucky enough to work for an organization that offers one, it’s an option you should highly consider.
However, not everyone takes advantage of the program for various reasons—either they don’t completely understand it, they don’t want to give up control of their money, they don’t want to wait until they’re older to have access to it, or they want to invest elsewhere, which is a huge mistake.
What is a 401k?
As an employer-sponsored program, the 401k enables employees to defer cash compensations into a 401k account, and the amount is typically nontaxable unless it is withdrawn. This can reduce your annual taxable income. For non-profits, the program is called a 403(b). If you are self-employed and don’t have any employees, there is the 401k solo account. All of them allow you to defer a portion of your income to other investment options—those may include bond funds, stock funds, index funds, real estate funds, foreign funds, mutual funds, money market funds, CDs, and more.
Should you save more than what your employer matches?
One of the major advantages of choosing a 401k is that most employers will match part of your contribution. The most common match is 50% of what you contribute from your paycheck, and they’ll match up to 6% of your salary. Some employers even match 100% of what you put in up to 6%.
But just because your employer doesn’t match more than 6% of your salary doesn’t mean you can’t contribute more to your 401k. In fact, as of 2021, the annual contribution limit is up to $19,500 for people 49 years of age and under and $26,000 for those 50 and older.
That might seem like a lot if you’re just starting out and it most likely is, but most experts agree that you should aim to set aside 10 – 15% of your gross income for retirement. Here are some of the advantages and disadvantages of saving more than the match in your 401k.
Advantages of saving more than the match in your 401k
Behavioral benefits
It’s easy to say you’ll put a certain amount of each paycheck into savings or investments. But in actuality, it’s much more difficult. With a 401k plan set up, you can simply let the investment happen without lifting a finger, and you can thank yourself later.
No income limitation
Compared to other retirement plans, there are no income limitations with a 401k, which means you can contribute no matter how much you make. This is a great way for high earners to invest in an employer-sponsored program and avoid having to look elsewhere.
Free advice
Most 401k plans come from big-name providers like Fidelity and Vanguard, which offer free advice on how and where to invest your savings. They’ll take into consideration your age, financial situation, and risk tolerance to help you choose the best investment.
Disadvantages of saving more than the match in your 401k
Individual stock limitations
Unfortunately, with a 401k plan, you cannot invest in individual stocks like Amazon or Tesla. Instead, you invest in exchange-traded funds or mutual funds, which invest in a wide variety of companies and industries. While these are safer investments, they won’t be getting you rich quickly.
Early withdrawal fees
As opposed to investing in the stock market, where you can get in and get out once you’ve hit the big one, there are early withdrawal fees with a 401k. If you withdraw before the official retirement age of 59 ½, you’ll have to pay a 10% penalty.
Roth IRA & traditional IRA
Now that we’ve gone over the 401k plan, we have to get into your other options—Roth IRA and traditional IRA. Both offer more investment opportunities and considerable tax breaks, but the difference is in the timing of the advantages.
With traditional IRAs, you don’t have to pay taxes on contributions now, but you do when you withdraw. With Roth IRAs, you have to pay taxes on considerations, but you don’t have to when you withdraw. The key factor in determining which one you’ll choose is where you think your annual income or tax bracket will be in retirement.
The difference between the two kinds of programs is that an IRA is owner established while a 401k is employer-sponsored.
The bottom line
It’s always advisable to max out what your employer is matching—usually 6%. After that, you might want to check out a Roth IRA or traditional IRA if you want more investment options. If you don’t qualify, you’ll want to invest the rest of your savings (up to 10 – 15% of your gross income) into your 401k so you can one day retire comfortably.
