401Ks

I finally worked for a paper that had a 401k and a matching payment in the late 1990s. Probably had $12,000 when the recession of 2001-2 hit, about the time I left the paper. The account dropped by thousands. It took six years for it to finally build back up to about $13,000+. That's where it was when the stock market dumped last year. Now it's back down to $8,000. It will take years to build back up to where it was in 2001.

That's twice in a decade my gains have been wiped out and turned into massive losses. I doubt that account will ever amount to much. I also don't think I'll ever trust Wall Street again. Seems every so often the market tanks and everyone gets hammered. And then it'll rebound and you'll finally break even and start making some money, and it'll tank again.

If you don't have a company match, don't invest in the company 401k. Open your own retirement account at discount broker Charles Schwab or something. At least you'll have a wide choice of options, rather than the relatively few options provided by company 401k's. Get advice. Also do your homework. Look at what mutual funds are investing in. Many of the mutual funds that mirror the S&P 500 invest heavily in financials, for example. Those funds have been hammered.

 

ALWAYS invest in a 401k. It's an automatic tax break. The money that's automatically transferred from your paycheck into your 401k account is exempt from taxes (until you retire and start withdrawals).
If you invest only in an IRA, that money is first taxed as earnings before you invest in the IRA.
If you invest $10,000 a year in a 401k, it's not taxed. If you instead invest that $10,000 into an IRA, it's first taxed as earnings before you take the IRA deduction.
And the investments you choose in an IRA can be essentially the same investments you choose for the 401k.

 

Yes and no. The plans offered as 401K vary company to company, so you might not have the full range of mutual funds or cash-equivalent accounts. But there are different income/contribution limits for the two types. For instance, if your household income is above a certain threshold, the tax deductibility of an IRA starts to phase out until it's gone completely. With a 401K, that doesn't happen. You'd still have a Roth IRA as an option (again, up to a certain point of family income) but that's not a tax decuction today.

If you like your company's investment options, go with the 401K. If you don't, and don't make so much that you lose tax deductibility, opt for an independent IRA. Don't forget to look into SEP-IRAs to divert some freelance income from the tax man (temporarily anyway), too. You can do those in addition to whatever you do with your day-job paycheck.