There are many reasons to participate in your company 401(k), primarily that you build a nest egg to avoid working throughout your retirement. Not all company’s offer their employees the chance to save for their future – if your company does, you should take advantage of this and put away as much as you can, then max out your 401(k) when possible.
If your employer is willing to match some or all of your contributions (the latter most likely being the case after you are fully vested), this is free money and more incentive to participate in a workplace retirement plan. In fact, if your employer is matching and you don’t participate, you’re essentially forfeiting a portion of your compensation.
401(k) Has Higher Contributions
Another reason you should participate to your company 401(k) plan is that a 401(k) has higher contributions than an IRA. For 2020, the 401(k) contributions are $19,500 if you are under age 50. Individuals who are age 50 and older receive a $6,500 catch-up contribution, which makes their 401(k) contribution $26,000 for 2020.
The 2020 contributions for an Individual Retirement Account (IRA) is $6,000 if you are under age 50, and $7,000 if you are age 50 and older.
Employer Match Vesting Schedule
There is usually a vesting schedule for company’s that provide a 401(k) match. If you were to leave your job or be terminated, the vesting schedule only affects the match. The contributions you make into the plan are yours, even when you leave the company. However, you most likely will not be able to keep the funds that your employer contributes until you are fully vested.
In other words, if you wish to keep the company match, you must remain on the job for a certain period of time until the match is completely yours. This may be as short as one year, or it can take many years to claim 100%. Because vesting schedules tend to be gradual, you will most likely receive 100% of the match after several years.
In certain cases, if you leave your job after a few years but are not fully vested, you may be allowed to take the match you accumulated over the years. This is money you otherwise wouldn’t receive if you did not participate in your company 401(k).
It’s important to know exactly what the vesting schedule is like at your job. Furthermore, if you are six months or one year from being 100% vested, it would be wise to remain on the job until fully vested.
Save Even More with an IRA
Another reason you should contribute to your company 401(k) plan is that a 401(k) has higher contributions than an IRA. But that doesn’t mean you should neglect the IRA altogether. Establish an IRA at a bank or financial institution and boost your retirement savings when you max out your 401(k). Even better than a Traditional IRA with a bank is the Self-Directed IRA with a passive custodian, such as IRA Financial Trust.
The Self-Directed IRA is a Traditional IRA that allows you to make both traditional investments and alternative investments, like real estate, tax liens and crypto. The primary benefit of self-directing is investment diversification, a highly advisable risk management strategy. Additionally, alternative investments tend to be hard assets, like precious metals and real estate. Hard assets often produce a steady income, even during times of inflation or political turmoil.
If you’re interested in learning more about the Self-Directed IRA, call IRA Financial Trust directly at 800-472-0646.