Is my 401(k) or 403(b) the best place to invest?
You’ve been contributing diligently to your 401(k), paying down debt, and are starting to wonder if there is something else you could be doing to maximize your investing for the long haul.
Many individuals start to engage in the planning process once they reach a point where they are starting to save beyond the minimum amount of the match in their company retirement plan. Below are a few suggestions for those that may be considering what the next step may be to take their investment plan to the next level:
Build up an emergency reserve. If you are set with an emergency reserve that covers 6 to 12 months of expenses, skip this step and move onto the next.
Having emergency cash savings at your local bank allows you to take on the risk of investing for the long-run, knowing that short-term cash needs are covered.
Contribute to your workplace retirement plan up to the company match. Even if you aren’t particularly a fan of your company’s 401(k), 403(b), or other workplace plan, if there is a match it is generally the best place to save. Albert Einstein is claimed to have called compound interest the greatest invention in history… though he may have changed his mind if he lived to see 401(k) matching contributions! So, make sure to contribute up to the match.
Review what types of IRAs you may be able to contribute to. After hitting the match, it makes sense for most to consider their options. Not everyone realizes it, but even if you have a workplace plan you can still contribute to an IRA; the only question is what kind of IRA is best for you. And if you have a spouse, you can contribute to theirs as well.
The benefits to opening an IRA are greater control and diversification, as well as clarity on the fees you are paying. Opening a Roth IRA also starts a 5 year clock to which you must have had the account open to avoid penalties, though you still have to wait until age 59½ just like other IRA accounts.
In a few situations, the best option for you may be to save more to your 401(k). Talk to a planner about your particulars to find out where to save.
The preceding blog was originally published by the Financial Planning Association®(FPA®). To view the original blog please visit the FPA Web site.