Not investing in your 401(k)? 5 reasons you are missing out.

401(k) accounts are one of the best retirement accounts on the market. And yet, I have spoken with numerous individuals not taking advantage of the 401(k) option within their employer plans. 

Why? The reasons I have heard run the gamut: from people not wanting the government to “control” their money (the government does not control where you invest the funds within your 401(k) account) to other arguments against the more limited investment options when compared with the options available inside a general brokerage account. While some of these reasons are more valid than others, I am firmly of the persuasion that there are extremely few reasons why any individual should not be taking advantage of a 401(k) option. 

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Now I am not advocating for blindly putting your money into a 401(k) account. Trust me, I get it — there are a lot of options for where to put your money. Do you prioritize retirement accounts? Paying off student loans? Saving for a house? There isn’t always a perfect formula for what to do. That said, if you aren’t utilizing your 401(k) account, you are probably leaving money on the table. 

Here are a few reasons why:

1. Tax breaks.

Let me say it again: Tax. Breaks. While you will still pay taxes on traditional 401(k) contributions when it is time to take distributions in your retirement, the deferred tax mechanism of this account allows your initial investing principal to be as large as possible. This is the amount that will be invested and compounds over time. If your income puts you in a 32% top tax bracket, this 32% is your immediate realized “savings.” This money, which would have typically been paid as taxes the year you earned it, is instead now doing work for you for years to come before it is ever taxed.

If, on the other hand, you are in a lower tax bracket currently (say 15%, for example), you might consider a Roth 401(k) option if your company offers it. This style of 401(k) would enable you to “lock in” your current low income tax rate, and still have your company withhold taxes from these Roth contributions, but then you could grow your money tax-free going forward, including when you take that money out in retirement. 

2. Matching!

Not every company matches employee 401(k) contributions, but if your organization does offer such an incentive, this is another reason for you to not pass up the opportunity for what is close to “free money.” Consider it a reward for investing in delayed gratification. Help them help you, and make sure to contribute to your 401(k), at least to the degree at which you will receive the maximum of your company’s available match. If company matching is a new concept to you or you want to check out an example of how the matching math works, learn more under Tip #27 from my post here. (Note: Please don’t use the match as a reason to only contribute up to the match if you can indeed contribute more – the match is really just some icing on your personal finance cake!)

3. Out of sight, out of mind.

One of the numerous advantages of the 401(k) option is that the money can be deferred directly from your paycheck. In other words, set it and forget it – set up your elected deferral amount once and then you don’t have to think about it regularly again. You also avoid the temptation of seeing the money in your savings and going through separation anxiety each time you manually make a contribution towards your retirement. The best part? Logging in after months and seeing how your contributions have grown – all because of one front-end decision! 

4. Avoid tax drag along the way.

When you do end up taking distributions from your 401(k) account, the money will be taxed as ordinary/regular income. Until then however, your money in the 401(k) is avoiding “tax drag” in a regular brokerage account, in which paying annual taxes on capital gains (aka those realized earnings on your contributions) takes a bite out of the principal that is generating money for you. Over time this tax drag results in lower overall money for you than not being taxed along the way because there isn’t otherwise as much money to generate those investment returns over the decades. Woo! And when you do come to the point of taking distributions in retirement, you will also have more control over the amount you are taking at a given time, and therefore have more agency to execute a tax-optimized strategy.

5. There are no income limits to contribute to a 401(k) + you have a (much) higher contribution cap.

Various retirement accounts, such as a Roth IRA, limit your annual contribution to a certain amount (for the Roth IRA it’s $6,500 in 2023). While a 401(k) does still have an annual contribution limit, it is significantly higher (currently $22,500 in 2023). For Roth IRA accounts, you may not be able to contribute (or only make a partial contribution) based on your income level, and for traditional IRA accounts, you may not be able to deduct the contributions you make based on your income level or other available employer plans(which otherwise is part of the point of contributing to one in the first place). 401(k) accounts do not have these limitations. No matter how much money you earn, you can probably incorporate this account into your overall retirement strategy. 



Considering the incredible advantages these accounts have, it’s worth your time to review your employer’s 401(k) plan and consider contributing to the extent it makes sense within your financial life. Your future self will thank you! 

P.S. You might be thinking . . . ok, but is there ever a time for a brokerage account? Absolutely! Keep an eye out for my next post on when and why a brokerage account can be the right move. 

(Note: There are of course a few other rules and caveats surrounding these retirement accounts that we aren’t addressing here!)

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Sarah Gerber