There is always more month than there is money, so the forced savings of a 401(k) plan is still a great option for putting money away for the future, financial advisors say.
But a 401(k) may not be all that is needed, some advisors caution.
“A 401(k) retirement plan is absolutely a good idea, especially if there is an employer match,” says Ken Sutherland, founder of LifePlan Group, a financial advisory firm in Raleigh, N.C.
A client can put more money away tax free in a 401(k) than in a traditional IRA, adds Saul M. Simon, founder of Simon Financial Group in Edison, N.J. Tax-free contributions of up to $18,000 (plus an additional $6,000 for those over 50 years of age) are allowed for 2016 compared with $5,500 for an IRA (with an additional $1,000 for those over 50).
“However, it is good to diversify, not only the asset allocation but the tax treatment of money for both now and in the future,” Simon says.
Larry Rosenthal, president of Rosenthal Wealth Management Group in Manassas, Va., agrees. “If you asked a group of advisors what they tell their clients, one-third would say they favor 401(k)s and one-third would say Roth IRAs. We like both.
“The rule of thumb is when a client’s income is lower, use a Roth IRA because they do not need the tax deduction as much. As income grows and the tax bracket increases, slowly switch to the traditional IRA or 401(k) to get a larger tax deduction,” Rosenthal says.
Upon retirement, if the client has both qualified and nonqualified plans, he will not have to pay taxes on all money that is withdrawn, Rosenthal says.
Another advantage of adding either a traditional or Roth IRA to the retirement savings plan is that the investor has more choice for investment options, says Alex Sutherland, also of LifePlan. A 401(k) usually has 12 to 30 investment choices, while there are actually thousands to choose from in the market.
“Advisors and their clients should also make sure they do their due diligence on the funds that are available in a 401(k) plan. Some people select funds that sound different but they turn out to be pretty much the same, which means the investor is going to have a great deal of volatility,” he adds.