Many people are shocked when they first find out how ridiculous the fees are in their 401(k) plan, but then they sit there and do nothing about it. They assume there's not much anyone can do about the choices and fees they are charged. But that's not exactly true.
While getting your company to change plan providers or upgrade mutual fund selections is often difficult, there are many different alternative places to stash your money in a tax-advantaged way. These options aren't a direct substitute for a 401(k), but they each have pros and cons worth considering if your 401(k) plan is just plain bad.
Roth and traditional IRAs. You won't get a company match here, and IRAs have much lower yearly contribution limits than 401(k)s, but you can invest in practically anything you want to within these accounts. Sometimes that can be dangerous if you are reckless, but you can also hold passive investments like the S&P 500 index for as low as 0.05 percent a year. That's seriously inexpensive.
529 plans. None of the earnings in these accounts will be taxed if used for qualifying educational expenses. And even if you end up having to pay the 10 percent penalty and ordinary tax rates when you withdraw the money because you simply saved too much, you already got years of tax-free compounded growth. Plus, many plans allow you to change beneficiaries, so the funds could be passed on from generation to generation until enough educational expenses are incurred that there are no tax consequences.
Health savings accounts. These are even better than 401(k)s from a tax standpoint, because money stashed in a HSA is tax deductible on your tax return and qualifying withdrawals for health expenses aren't taxed at all. You can use these accounts to pay for health expenses every year, but some people treat them as investment accounts. They pay for their health expenses out of pocket, and keep the money in the accounts invested for the long haul.
iBonds and EE savings bonds. These federal government bonds allow you to defer taxes for as much as 30 years (the maximum holding period of these investments). The other perk of these bonds is that there are no state taxes, so residents in high tax states can save quite a bit.
Get a side business and even more options open up. Solo 401(k)s, SEP IRAs and defined-benefit plans have generous yearly limits, but are only available if you have self-employment or side business income. In addition, you control who the provider will be, so spend some time comparing options to find the best choice that fits with your investment strategy.
If you maximize all your options you could put away 6 figures a year in tax-advantaged savings. Plus, your 401(k) probably isn't as bad as you think. While many plan choices can use some improvement, the automated savings feature and possible company match almost always make a 401(k) a great way for most people to save for retirement. Don't lose sleep over what you cannot control, and work on saving more.
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