Why a 401k shouldn’t be your only retirement account.
You’ve heard about not putting all of your eggs in one basket. This same concept applies to your retirement portfolio as well. Just ask the Enron employee who had over $1million which was wiped away to less than $500 in a few weeks after that accounting scandal came to light.
It’s simple. More diversification equals more options, more choices, less risk, and more flexibility.
While there are many benefits to investing in a 401k account, you should not put all of your retirement account in ONLY a 401k account.
With a 401k account, you do not pay taxes now but pay taxes when you take money out in retirement. The assumption is that you will be in a lower tax bracket when you retire. However, no one knows if Congress will increase taxes before you retire. With the billions of dollars of stimulus money put into the economy due to the pandemic, the country went into even more debt. At some point, the debt will have to be paid and there may be a chance that Congress raises taxes on individuals and corporations.
Spreading your money across several assets, taxable and non-taxable, will minimize taxes and income.
There are also limits to 401k accounts. You cannot withdraw money prior to the age of 59 ½ without paying penalties and taxes on your money. However, you can withdraw the initial investment amount from a ROTH IRA account after is has been opened for 5 years.
Besides an individual IRA and Roth IRA, there are many more option types for your money. Some short-term investment options include cash, high-yield interest savings account, money market account, or CD with a short time limit. Of course, you can still invest in precious metals and jewels, real estate, bitcoin, and other investments. Be sure that you are educated about the investment type and know the risks.