There’s an easy way around this, though. You can transfer your funds to an IRA after you retire. This gives you more freedom over how you invest your money, and it can help you avoid losing too much of your savings to fees.
2. You’ll owe taxes on most 401(k) distributions
You get a tax break the year you make most 401(k) contributions, but then you owe the government its cut when you take the money out in retirement. This could save you money if you’re in a lower tax bracket in retirement than you were while you were working. But if you’re in the same or a higher tax bracket, you could find yourself paying through the nose to use the money you’ve spent decades saving.
If you don’t think a traditional 401(k) makes sense for you from a tax standpoint, you could save in a Roth 401(k), assuming your employer offers one. You pay taxes on these contributions upfront, but your withdrawals in retirement are tax-free. However, that doesn’t apply to employer matches. These contributions are tax-deferred, just like traditional 401(k) contributions.
You could try saving in a Roth IRA if your company doesn’t offer Roth 401(k)s. These accounts are taxed the same way, but Roth IRAs give you way more freedom to invest how you want. The downside is that you can only contribute up to $6,000 to an IRA in 2021, or $7,000 if you’re 50 or older, compared to $19,500 and $26,000, respectively, with a 401(k). However, you could always start saving in your 401(k) to get your company match, then switch to the Roth IRA until you max it out, and then switch back to your 401(k) if necessary.