Investing outside of your employer-sponsored retirement plan, most likely a 401k or similar plan, is something most people don’t think about. If your employer offers an employer-sponsored retirement savings plan you should be participating. Contributing enough to get the employer match is a good strategy. You don’t want to leave money on the table!
However, what do you do when you max out on your contributions? What if you want to plan for nearer-term goals than retirement? What about investing for college? What about saving up for a down payment on a home?
Here are five reasons you should invest outside your 401K or any other employer-sponsored retirement plan (IRA, 403b, Thrift Savings Account, etc.)
Liquidity (Access to Cash)
Retirement accounts like 401Ks are meant to be used only when you have reached retirement age. Unless you are 59 1/2 years of age or older there’s a 10% early withdrawal penalty. As a result, cashing out from your 401K is costly.
It is possible to take a loan from your 401K for a hardship (medical expenses, funeral expenses, etc.) but this money must be repaid. If you change employers before the loan is repaid you have to pay back the outstanding loan balance or pay an early withdrawal penalty.
Investing in a non-retirement account gives you the flexibility to access the funds without taking a hit from the IRS. This way, you can save for other non-retirement goals like a down payment for a house, new car or expensive vacation.
Related resource: Open a Free Investing Account Now
Select Specific Investments
Most employer-sponsored retirement plans or 401Ks typically offer limited fund options to participants. Spreading the risk among a group of investments is generally a good thing when saving for the long term. But this usually means you miss the opportunity for significant gains on select investments, like individual stocks.
For example, I couldn’t buy Facebook stock when it was under $20 a share shortly after the IPO with my 401K. Individual investors that did purchase it then made significant gains when the stock recently topped $100 per share.
Financial institutions managing 401K plans for employers don’t do it out of the goodness of their hearts. Nope, they’re making money by charging fees. There are three types of fees.
- Administrative Fees – There’s generally a fee built in that supports the management of the 401K including accounting services, recordkeeping, and other infrastructure required for the plan.
- Fund Fees – Those funds I mentioned that spread the risk. They also come with fees for the fund managers. The fees cut into your return as they are taken off the top. If you have a target date fund that includes other mutual funds you’re paying twice! It’s legal double jeopardy.
- Sales Fees – There may be commissions or loads paid as a result of transactions.
The end result of all these fees is that you are losing out on returns that could have been compounding year after year.
Ownership of Funds
Think you own your 401K account? Think again. Because 401K plans are tied to the Internal Revenue Code (otherwise known as tax code), Congress can change laws that govern your account. The end result could be confiscating it, for your own good of course.
It’s not unheard of as other westernized nations have done so to help the country out of a financial pinch. Just last year Poland took over half the money saved in individual retirement accounts. According to Bloomberg Business at least 10 other countries have taken similar actions.
Although this is highly unlikely
in the United States because of the checks and balances with three branches of government, the mere possibility is enough reason to invest excess income outside a 401K.
Fun (and Education)
My husband and I each have trading accounts to invest individually. We pick investment opportunities (like stocks and ETFs) based on our own research and preferences. Being of competitive natures we have friendly exchanges comparing returns against each other.
While we’re having fun there’s some learning going on. Getting to know how to analyze a stock has been informative, interesting and is a good life skill to have.
These are just a few reasons it’s important to pursue investments outside your employer sponsored 401K plan. Have you started investing outside 401K accounts?
Free Resources to Start Investing on Your Own
More Resources on Investing:
- Open a free online brokerage account with Ally Invest
- Investing for College- A Comprehensive Guide
- Watch Me Invest $5,500 of Real Money in Vanguard ETFs
- Invest your spare change with Acorns
- How I Turned $500 to $29,000 with this DIY Investing Strategy
- Investing for Beginners Stocks versus ETFs
- How to Invest in Individual Stocks
- Free Investing Course
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