Credit: Shutterstock photoYour nest egg is fragile and a bad decision could cost you up to 30%. The two most-asked questions about retirement accounts are: 1) After I leave my employer, should I stay in the 401(k) or roll it over into an individual retirement account, and 2) how much should I save in my 401(k)?
The key is how much you pay in fees. Your money in both 401(k)s and IRAs is tax-deferred, meaning you pay no tax on it until you start withdrawing your money - and as a retiree, may be in lower tax bracket. Trouble is, although you save in taxes, fees can nibble away at your gains.
A study by Demos, a research group, found that fees could reduce the value of your 401(k) by over 30%. The upshot, according to a Los Angeles Timesarticle : "The average American couple could pay nearly $155,000 in fees for their 401(k) plans over their careers, reducing their eventual nest eggs by more than 30%."
Without any fees, this couple has $510,000 at retirement. With the fees, their total is only $355,000. The fees include charges to manage the fund and indirect expenses, such as the cost of trading its underlying securities. Not counted here are the opportunity costs, which are the lost investment returns on that $155,000.
So should you leave your money in your employer's 401(k) plan?
If your previous employer pays the fees or has a low-fee plan with good investment options, then it may make sense to leave it in the plan. But if your employer is like most companies, where management does not understand the fees that 401(k) providers charge, then it may be a better idea to roll it over into an IRA that has low fees.
How much should you save in a 401(k)?
The answer has two parts. First, free money is the best kind of money. So if your company provides a match to what you put in, I normally recommend you contribute up to the match. After that point, it may not be in your best interest to put any more money into your plan.
While deferring taxes may sound good, it comes at a price. The fees discussed earlier should be a major concern. Tax deferral is not worth losing 30% of your nest egg.
Next, there are government restrictions on your money. A 401(k) is one of the most restrictive types of investment accounts an individual can own. You have penalties if you take money out before 59 1/2 and penalties if you take too little out after 70 1/2. Yes, you have deferred your taxes, but there is no guarantee that taxes will be lower when you retire.
Finally, remember that, when you pass your 401(k) onto your heirs, they will owe two types of taxes: income tax and estate tax.
Complicated problems require expert advice. Find advisors who know how to deal with these types of issues. Then make a smart decision about how to save for retirement.
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Mark Fried is the president of TFG Wealth Management in Newtown, Pa. His website is www.tfgwealth.com .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
