When you Google “best retirement accounts,” 401(k)s frequently top the list. There’s good reason for that: they’re quick and easy to sign up for and managed by a third-party firm. But despite being billed as one-size-fits-all solutions, for some, they’re among the worst retirement accounts available.
Here are 6 reasons your 401(k) might not be all they're cracked up to be:
1. Not everyone qualifies
If you have a job that offers a 401(k), great! Despite the downsides below, it still might be your best retirement savings vehicle.
But if your job doesn’t offer one, you might be stuck with an IRA or taxable investment accounts.
If you fit the criteria to open a solo 401(k) as an entrepreneur, you'll have to jump through some hoops, and then you'll be on the hook for both employer and employee contributions. Fun times.
2. You have little (no) control over your assets
One reason 401(k)s sound nice is that someone else manages your account after you “choose” your assets.
Unfortunately, that choice is…fundamentally false.
In most cases, you have access to a handful of mutual funds. No ETFs. Employers these days may try to keep fees low, but really, you’re stuck with what your employer offers, regardless of whether it jives with your goals and risk tolerance (and most importantly, the fees you want to pay.
3. You get penalized for early withdrawals
The trade-off for getting tax benefits is that once you’ve locked in your assets, all you can do is contribute money and watch your portfolio’s performance. Sometimes – even most of the time – that works out: the stock market rises, and your assets climb, too.
But when the economy crashes (for instance, due to a global pandemic)…well, it’s not exactly a shock that 401(k)s shed 20% in 2022. Yep, you read that right: employees lost an average of $20,000 for every $100,000 saved in just one year.
When the market falls, that's usually the worst time to sell. But sometimes, everyone has cash needs to satisfy, and during times of stress may require dipping into retirement savings.
Don't do it if you can't help it, because the IRS taxes early withdrawals.
4. Fees, fees, they’re good for…well, not you
The fees 401(k)s charge eat into your returns. Every dollar you pay someone else – based on your assets under management, nonetheless – is a dollar that won’t work for you earning compound interest.
5. That company match is usually tiny
Look, I’m not here to bash free money.
But as pension plans disappear, employers continue to shunt more of the burden of saving for retirement under workers. (The same workers buckling under rising inflation everywhere else.)
Sure, some companies still match contributions up to a dollar or percentage amount. And many will leave you to save – or not – on your own.
6. Ready or not, here the IRS comes
Defined contribution plans like 401(k)s require you to start taking distributions at a certain age. (Currently age 73; set to rise to 75 in 2033.)
Why?
So the IRS can tax those sweet, sweet dollars you’ve been squirreling away your entire career. If you don’t take your RMDs – and pay the accompanying taxes – the IRS will take 50% of the amount you didn’t withdraw.
Oof.
Avoid the wrong retirement accounts like a pro
If you’re looking to avoid the worst retirement accounts for your situation, you’ve come to the right place. Every account has its trade-offs and tax consequences, and you’ll have to decide which ones you will and won’t accept. Reach out of you have more questions.