Three Pitfalls of Only Using a 401(k) for Retirement
Investors love 401(k) accounts for retirement savings, but they provide the best results when used in conjunction with other investment vehicles. Tax benefits, systematic saving, asset growth, and employer contributions are all fantastic features of 401(k)s, but relying on them exclusively can have negative tax ramifications, limit investment opportunities, and hamper liquidity. Investors should consider other types of accounts to develop a comprehensive retirement plan that is designed to flourish in different circumstances.
Tax advantages are among the most frequently cited benefits for 401(k)s. Contributions are pre-tax, meaning that they are deducted from paychecks and excluded from taxable income, which allows these funds to grow on a tax-deferred basis throughout a person's career. Qualifying withdrawals are taxed as ordinary income while avoiding capital gains taxation.
Many people expect to be in a lower tax bracket during retirement relative to their working years. The same lifestyle can typically be sustained in retirement on a lower income as payroll taxes are not incurred, and expenses from commuting, child-rearing, and housing are often no longer in the picture. This wisdom has merit, but tax diversification can be transformative to a portfolio.
Source Fool.com
