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January 12, 2021

Greetings Thrifty Friends,

A 401(k) is a defined-contribution retirement account offered by many employers to their employees. It is named after a section of the U.S. Internal Revenue Code. Workers can make contributions to their 401(k) accounts through automatic payroll withholding, and their employers can match some or all of those contributions. The investment earnings in a traditional 401(k) plan are not taxed until the employee withdraws that money, typically after retirement.

Because of these advantages 401(k)s are popular savings and retirement vehicles for many Americans. And they're good plans, but just because your company offers a 401(k) doesn't mean it's the right fit for you.

Following are a few reasons to pass up your employer's 401(k) and find better investments for your money.

Keep pinchin' those pennies,

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1. You don't get an employer match

Many companies that sponsor 401(k)s also match employee contributions to varying degrees. But if your employer offers no match whatsoever, then it pays to consider housing your savings elsewhere.

2. Your plan comes with high administrative fees

It costs money to maintain a 401(k) plan, but unfortunately, that expense is generally passed on to you, the saver. If your plan's administrative fees total more than 1%, it may be time to find a new place to stash your long-term savings.

3. You're stuck with limited investment choices

Generally speaking, 401(k)s offer fewer investment choices than IRAs -- because in a 401(k), you can't put your money into individual stocks like you can in an IRA. Rather, you'll be limited to different funds that can charge high fees. If you're not happy with the choices your plan has to offer, it could make sense to open an IRA.

With a 401(k) plan, you can contribute up to $19,500 this year if you're under 50 and up to $26,000 if you're 50 or older. Not only can that result in major near-term tax savings, but it can also set you up for a very comfortable retirement.

IRAs, by contrast, max out this year at $6,000 for workers under 50 and $7,000 for those 50 and over, so those tax benefits are more limited. But if you're not happy with your 401(k), it could still pay to move your savings to an IRA, despite those lower limits.