Having access to a 401(k) can be a blessing or a curse depending on how it’s structured. If you’re forking out big bucks for fees or the match is minimal or nonexistent, you may be wondering whether it’s even worth keeping. If your 401(k) isn’t helping you save, it can be difficult to keep your retirement planning on track. But it’s not impossible if you know how to deal with it.
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1. Look for the Positives
Before you give up on your plan, it’s a good idea to look for a silver lining. For example, if your employer offers a generous match, that could be a strong incentive to at least chip in the minimum. Letting that free money slide through your fingers could cost you an average of $1,336 per year and the goal is to grow your nest egg, not shrink it.
When no match is available, you can think about contributing to your 401(k) for the tax advantages it offers. Any money you funnel into your employer’s plan reduces your taxable income for the year. If you’ve gotten a raise or you don’t have a lot of deductible expenses, those 401(k) contributions can have a big impact on how much you owe Uncle Sam once April rolls around.
2. Look for a 401(k) Alternative
A 401(k) isn’t the only way to save for retirement and if yours makes you want to cry, you do have other options. Although their annual contribution limits aren’t as high as those for 401(k) plans, there are lots of reasons to consider adding a traditional IRA or a Roth IRA to your savings plan.
For 2015, you can save up to $5,500 in either type of account or $6,500 if you’re 50 or older. The cap on contributions is adjusted annually for inflation. Anyone can save in a traditional IRA, but whether your contributions count as a tax deduction depends on your income and whether you or your spouse has a retirement plan.
Related Article: Which Type of IRA is Right For You?
With a Roth IRA, your ability to contribute is based on your annual earnings and your tax filing status. You won’t get a deduction for anything you save since you’re putting in after-tax dollars but that means no additional tax is due once you start making qualified withdrawals.
3. Save in a Taxable Investment Account
If you’re saving enough in your 401(k) to get the match and you’re maxing out an IRA, setting up a taxable investment account could be a good next step. While they don’t offer the same type of tax structure as a qualified retirement account, they do give you a little more flexibility when it comes to diversifying your portfolio.
Generally, you can go through a broker or purchase stocks and other securities through an online brokerage. With an online company, the commissions and fees might be a little lower. Instead of paying a broker $5 to $10 to trade a stock, for example, you might be able to pay $4.95.
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If your goal is to choose the least expensive investments possible, exchange-trade funds (ETFs) could be a good place to start. They tend to have lower expense ratios compared to mutual funds. The expense ratio is the percentage of the fund’s assets that are used to cover the operating costs each year and a higher number means that more expenses are eating into your earnings.
If you’ve gotten a bum deal with your 401(k), you don’t have to give up on your retirement dreams. The key is to wring as much as you can out of the plan while taking advantage of other savings vehicles.
A financial advisor can be a useful resource as you figure out your options. Financial advisors often specialize in retirement planning, so they’ll be well-equipped to help you figure out how to keep maximizing your retirement savings in spite of a bum 401(k). A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
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