Should You Invest In A Non-Matching 401K?

My wife works at a relatively small startup-type company that has a 401(k) plan but offers no employer match. One of the things I had researched was whether it was a good idea to put funds towards a 401(k) plan or if other options were better for her and broke it down to several considerations.

$15,500

That’s how much money you can put, tax-deferred, in a 401(k). What that means is that you don’t pay tax on it today, you defer the tax until you start taking withdrawals in retirement. When you make a $1 contribution, it reduces your income by $1 and you don’t pay tax on that money. The benefit from the 401(k) is that you can invest your tax-deferred money and avoid taxes until retirement. There is no other investment vehicle like that for an employee in terms of magnitude.

The only other similar option would be a Traditional IRA but that has some downsides. First, depending on the rules of your 401(k), you may not even be able to deduct contributions to a Traditional IRA. Second, it shares the same contribution limit as a Roth IRA, which grows tax-free (you pay taxes on the contributions). I recommend taking advantage of the Roth IRA, so a Traditional IRA is almost never an option unless you’ve exceeded the income limits.

Fund Options

If your employer lets you pick from a nice healthy basket of mutual funds or stocks, that’s the ideal. If your employer, such as my first employer, only offers their own private versions of funds then you may be in a tough situation. You might want to investigate what types of funds you have available as well as the expense ratios associated with them. Also, be sure to review the administrative fees associated with your employer’s plan. A mere 1% in fees can take a huge chunk out of your retirement savings.

Now, are fees reason enough to stop contributing? No, but if you have multiple options, it’s good to investigate each one. Not all of us are going to have $15,500 to contribute, or even $5,500, so you’ll want to make sure you get the most bang for your buck.

Ultimately, she participated because the tax benefits were significant enough and because her employer offered a nice selection of funds. Despite not having an employer match, the tax-deferred status of earnings and the amount she could contribute was simply too good to give up.

Plus, nothing says you can’t ask your employer to start offering a 401K match!


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