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Is 401K really the best option? A look into retirement savings

SPRINGFIELD, Mo. – 401(k) are one the most popular ways to save for retirement, but other investments options could be a better fit for you.

Local financial professional Brad Pistole from Trinity Insurance & Financial Services has four reasons why you might want to skip the 401(k) contribution.

HOW DO YOU DECIDE IF A 401(K) PLAN IS THE RIGHT INVESTMENT OPTION FOR YOUR MONEY?

Consider the Long-Term Tax Implications

  • The money you take out of a 401(k) counts as taxable income in retirement, and the amount of taxes you pay is based on your income. 
  • For example, if you receive Social Security benefits and take other distributions from an IRA and 401(k), you may end up in a higher tax bracket. This can result in much higher tax liability than you were expecting.
  • You may also end up paying more taxes on capital gains, dividends and interest from your investments as well. 

Review Withdrawal Rules

  • If you withdraw from your 401(k) before age 59 and a half, that money will be taxed as regular income, and you will pay a 10% penalty. If you cash out all or part of your investments, it will be a 20% penalty.
  • There are a few exceptions to early withdrawal penalties. Pistole recommends consulting your financial professional if you are considering taking money from your 401(k).
  • On the flip side, you will also get hit with a penalty if you don’t withdraw money from your 401(k) after age 72. If you do not take your required minimum distributions after that age, you could face a 50% tax penalty.

Examine Your Investment Options 

  • Investment options offered in 401(k) plans can be limited, and investing in individual stocks is not an option.
  • Instead, investments include a mix of bonds, equity and target-date funds.
  • The choices offered may be confusing as well. Do your homework to determine all of your investment options, especially before using the employer’s default choices. 
  • A financial professional will be able to walk you through the specifics of the investments in your 401(k) plan.

Research Fees 

  • Almost everyone who has a 401(k) plan pays a fee, but nearly 40% of Americans don’t understand the fees associated with their accounts.
  • The fees you’re paying on your 401(k) may seem small, but they add up quickly. 
  • Take a look at your next statement to see how much you’re paying in fees.

Q: WHAT ARE SOME ALTERNATIVE INVESTMENT OPTIONS? 

Traditional IRA & Roth IRA

  • There are many types of IRAs. The two most common are the Traditional IRA and the Roth IRA.
  • There is no minimum for most IRAs, either Traditional or Roth.
  • Even if you only contribute a little bit from each paycheck, it can make a big difference in your savings – especially if you start early and give your money time to grow.
  • The money you put into a Traditional IRA is not taxed, but the money you withdraw is taxed as regular income. A Roth IRA contribution is made after taxes; you can then withdraw that money tax-free.

 Save in an HSA

  • A health savings account is a tax-advantaged savings vehicle you can use at any age to pay for qualifying healthcare expenses.
  • People contribute to an HSA to fund current healthcare costs, but the balance carries over each year, and that money will continue to grow. 
  • A health savings account is only available if your employer offers a high-deductible health plan.