Is Your 401(k) Plan Still Right for You?

is your 401(k) working for you

The investing community is one that can often be stuck in tradition. It can take years or even generations for investors to change their minds about investment assets, methods, or vehicles. Meanwhile, millions of ordinary investors looking to boost their retirement savings could remain investing in ways that don’t make any sense to them or their investment goals.

Take stocks for instance. You’ll read all over the place that stocks are the best way to achieve asset growth. You’ll hear about how the long-term average growth rate of stocks is 7%. And you’ll hear anecdotes from friends, family, and colleagues about how much money they made investing in stock markets.

But the reality is that stocks have been a fairly middling investment over the past 20 years. Sure, if you timed markets right and bought the dip just right over the past few years you could have made pretty big profits. But how many investors timed the market just right and made those gains? And how many more will remain invested in stocks during the next dip, which could be the start of a major crash?

Even more to the point, how will stocks fare over the next 20 years? If you’re set to retire soon, you could very well live 20 years or more in retirement. If your investments are largely held in stocks, will they perform well enough over the next few decades to give you steady and sufficient income in retirement?

Stock markets have averaged less than 5% annualized growth since 2001. Compared to other investments such as bank savings accounts, that’s not bad. But it lags the performance of better assets such as gold, which has seen annualized growth rates of 10% in that same time period. Because so many investors stick with advice that they believe to be tried and true rather than crunching the numbers for themselves, they’re not aware that there are better investment options out there for them, and thus they could be losing out on significant amounts of potential gains.

The Disadvantages of the 401(k)

With the demise of defined-benefit pension plans, most employer-sponsored retirement plans today are of the defined-contribution type, with the 401(k) plan being the dominant workplace retirement plan. Americans today hold $5.6 trillion in 401(k) plans, and that sum keeps rising every year.

But the 401(k)’s origins were from a different time, when tax rates were higher, interest rates were higher, and stock market growth had yet to take off. Some experts have crunched the numbers to compare the advantages of a 401(k) in 1980 versus a 401(k) today, and have found that a 401(k) doesn’t have nearly the same advantages today as it did 40 years ago.

In the 1980s, the tax advantages of a 401(k) offered the equivalent of an extra 9% investment return each year. Today, it’s only the equivalent of 0.6%, a sum easily outweighed by many management fees. And when 401(k)s are used to invest in assets taxed at capital gains rates rather than ordinary income tax rates, that tax advantage disappears completely.

Does the 401(k) Still Make Sense?

Knowing that, does investing in a 401(k) still make sense for most investors? From a tax perspective, it might or it might not. Consult with your tax advisor to see if that’s the case for you. But a 401(k) does still offer two great advantages.

First, many employers offer a 401(k) match. The more generous the employer match, the more advantageous it is to invest in a 401(k). That’s free money that you’re leaving on the table if you don’t take advantage of it. If your employer offers a 1:1 match up to 5%, for instance, putting 5% of your salary into a 401(k) means that you’ve automatically doubled your investment, regardless of whether stocks perform well or not. And if those assets are automatically vested, or vested after a short period of time, those assets are yours do with as you please.

Secondly, by having your savings in a tax-advantaged account already, it becomes easier to transfer or roll over those assets into other tax-advantaged accounts without tax consequences. Some plans allow you to do a 401(k) rollover at any time, while others only allow you to do so after you leave your job. But whenever you’re able to roll over funds from your 401(k), you can move them into other retirement accounts such as a self-directed IRA that can allow you to invest in better performing investments.

Benefits of a Self-Directed IRA

One type of self-directed IRA that is becoming more and more popular with many investors is a gold IRA. A gold IRA operates just like any other IRA, except that it invests in physical gold coins and bars. That allows investors to benefit from the growth potential of gold and an investment in tangible assets while still enjoying the same tax advantages as their 401(k), IRA, or other retirement accounts.

With gold recently having pushed above $1,850 an ounce, and less than $75 away from its all-time highs, there’s still plenty of room to run. We’ve only just recently entered into recession, and we haven’t even seen the worst part of the recession. Gold has a reputation for performing well even when the economy doesn’t.

From 2008 to 2011, gold nearly tripled in price as investors flocked to its safety and security in the face of financial crisis and a weak economy. Could it do the same thing again?

If you have assets in a 401(k), 403(b), TSP, IRA, or other tax-advantaged retirement account that you want to put to better use, maybe it’s time to start thinking about investing in a gold IRA today. Can you afford to lose 50% or more, like stock markets did during the Great Recession? Probably not, which is why a gold IRA is beginning to look like a good choice for more and more investors.

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