When it comes to employer sponsored plans, such as the 401(k), 403(b) etc., we recommend that you only contribute up to what your employer will match. Below is a video clip from Jim Cramer on his show “Mad Money”. He is a well respected financial guru and he nailed it regarding 401(k) plans and their pros/cons.
- They leverage pre-tax dollars
- No tax on profits: either capital gains or dividends
- Contributions and profits compound for years tax-free until you start to withdraw
- Management fees and administrative costs eat into your potential returns
- Limited and poor fund selection
- Funds offered normally have high expense ratios
- Lack of control
So what can you do to maximize your earning potential in your 401(k) plan?
- Max out what your company will match, nothing more though. Take advantage of the free money!
- Select a fund that provides massive global diversification
- Look for funds with the lowest expense ratios: either ETF’s or Index funds
- Any additional funds should be invested by yourself in a self-directed Individual Retirement Account (IRA): either Traditional or Roth.