Which is Better: 401(K) or Investing In Stocks?
Landing your first professional job is a great feeling. There’s nothing like seeing your own name on your office door, and sitting down in your ergonomic chair before getting down to work. Many full-time jobs in the United States offer 401(K) retirement plans. Everyone knows that saving for retirement is wise, but which is better: putting money into a 401(K) or investing in stocks? For most people, the 401(K) wins, for the following three reasons.
1. 401(K) is tax-deferred. Money that your employer directly deposits into your 401(K) plan comes out before taxes are assessed on your paycheck. This means your tax burden is lower. But if you take, say, $100 from each paycheck and invest it in stocks, you will have already paid payroll and social security taxes on that money. The 401(K) lets you maximize investment while minimizing taxes.
2. Many 401(K) plans come with employer matching contributions. Many employers will match a certain percentage or dollar amount of your 401(K) contributions. Start in your 20s with an employer-matching 401(K) plan, and you’ll be tens of thousands of dollars ahead of the game by the time you retire. You’ll have a hard time finding someone to match your personal investment in the stock market.
3. 401(K) plans can be diversified. You can change how your 401(K) contributions are invested, putting your funds into a mix of stocks and bonds to satisfy your tastes and needs. If you’re young, you can put your 401(K) money into stocks, because you have a long time before retirement and can afford the risk. If you’re older, you can switch to more conservative investments to minimize risk.
There’s nothing wrong with investing in the stock market, but investing in a 401(K) is safer and has tax advantages that can’t be beat.
