Headlines promising "better ways to save than a 401(k)" are common. The honest answer is that for most workers with access to a decent plan and an employer match, the 401(k) is hard to beat. But it is not always the best next dollar, and some workers have no plan at all.
Start with the match
If your employer matches contributions, contributing enough to get the full match is usually the first step. No other option offers an immediate return of that size.
Options that may come next
- Pay off high-interest debt. Credit card interest rates often exceed likely investment returns. Clearing that debt is a guaranteed return.
- Build an emergency fund. Without savings for emergencies, people often end up withdrawing from retirement accounts early and paying tax and penalties.
- An IRA or Roth IRA. IRAs can offer more investment choice and lower fees than some workplace plans. A Roth IRA allows contributions (not earnings) to be withdrawn at any time, which gives flexibility. Income limits apply to direct Roth contributions.
- A health savings account. If you have a qualifying health plan, an HSA's tax treatment is better than a 401(k)'s for medical costs. See our explainer.
- A taxable brokerage account. No tax deduction, but no restrictions on access, and long-term gains are taxed at lower rates. Useful once tax-advantaged options are used.
When the 401(k) is weak
Some plans have high fees or poor investment options. Fees compound over decades, so it is worth checking the plan's expense ratios. Even then, contributing up to the match and saving additional money elsewhere is often sensible.
No workplace plan?
Self-employed people can use a SEP-IRA or a solo 401(k). A growing number of states run automatic IRA programmes for private-sector workers without a workplace plan.
The bottom line
The order of priorities depends on your debts, savings, tax rate and plan. The best plan is the one you will actually stick with.
Sources
General information about the law as it stood when this page was updated, not financial, tax or legal advice. Rules and limits change; check the official source or a qualified adviser before acting.