Should You Still Invest In Your 401k?

One of the most popular retirement savings plans in the U.S., the 401k is named after a section of the Internal Revenue Code that came about in 1978.  Over 30 years later there are now over 65 million of these retirement accounts floating around, many of which have seen their balances cut in half over the past two years.

Managing your 401k going forward may require a different mentality than the past, when it seemed stocks only went up.  Previously, many Americans had simply ignored this tax friendly investment vehicle.  Many that didn’t ignore them  invested blindly, selecting the hottest-performing funds to the detriment of their net worth.

Many Americans may be questioning whether investing in their 401k is still a wise move in light of all the recent market carnage.  While it’s true that many 401k plans are full of expensive, poorly-performing mutual funds (like mine), they still have plenty of benefits that make them excellent investment vehicles

Why You Should Still Invest In Your 401k

Tax-Deferral

Originally, the 401k was established as a way to save money without paying taxes on it until you were in a lower tax bracket.  Today we face a massive federal debt and unfortunately, our government will probably have to make up that money by raising taxes somewhere down the line.  This possibility limits the appeal of investing in a 401k somewhat, but the prospect of  three, four, or even five decades of tax-deferred growth is still powerfully attractive.

401k Employer Matches

Probably the most important benefit of socking money away in your company sponsored 401k plan has been the employee match that most large companies have offered.  So compelling is this benefit that some have debated the utility of investing in a 401k at all without a company match.  Unfortunately, one of the first expenses many companies cut when the recession hit were the matching 401k contributions.  But it’s not as bad as it sounds.  Many companies retained their match and of those who cut back, most report they plan to reinstate them within the next 12 months.  If your match was one of those cut and you don’t anticipate it being reinstated anytime soon, you may want to consider starting a Roth or Traditional IRA instead.  But by no means should you pass up a company match.  That’s like turning down free money.