401k plans are one of the most popular retirement savings options available, but not all 401k plans are created equal. Some 401k plans have diverse investment options, low fees, and user-friendly online platforms, while others may have limited investment options and high internal operating expenses that drive up fees.
So, what should you do if you and your spouse are currently maximizing your 401k contributions, but the fees on your spouse’s 401k plan are high? Here are some factors to consider when making this decision:
- Tax Savings: Even if your spouse’s 401k plan has high fees, it may still make sense to participate if you are in a high income tax bracket. The tax benefits you receive from contributing to a 401k could be substantial, and could more than offset the fees you pay.
- Employer Match: If your spouse’s employer offers a matching contribution, this is free money that should not be ignored. The employer match is essentially a guaranteed return on your investment, so you should always take advantage of it.
- High Interest Debt: Before investing in a 401k or other retirement savings option, it’s important to pay off high interest debt, such as credit card balances.
- Roth IRA: If your spouse’s 401k plan has high fees and limited investment options, you may want to consider a Roth IRA instead. With a Roth IRA, you have more control over your investments and can choose from a wide range of low-cost providers.
- Tax Rates: When determining the best way to invest for retirement, it’s important to consider your current and future tax rates. If your tax rate is relatively low now, it may make sense to contribute to a traditional 401k or other tax-deferred retirement savings option.
- Hyper Accumulation: Once you have established an emergency fund, paid off high interest debt, and optimized your retirement savings contributions, it’s time to focus on hyper accumulation. This is where the three-bucket strategy comes into play, and where you can start thinking about how to maximize your investment returns and minimize your taxes.
In conclusion, choosing the right retirement savings option for you and your spouse can be complex, and it’s important to weigh the benefits and risks of each option carefully. By understanding the Financial Order of Operations, you can make informed decisions about how to build wealth and prepare for retirement. If you have any questions about maximizing your retirement savings, don’t hesitate to reach out to a financial advisor for guidance.