Is your hard-earned money better off riding the trends of the Stock market or should you contribute the spare cash to a 401(k) plan? For the average Joe with minimal to no experience in investing, this can be a hard question to give a straight answer to. Look no further as we discuss the pros and cons of both financial vehicles in terms of their ability to grow capital.
The Pros and Cons of a 401(k) Plan
Generally, 401(k) plans are regarded by financial experts as a subpar alternative to the more traditional pension plans. However, one must not hastily disregard the option. A 401(k) plan offers some tax break. Any cash you put into it comes from pre-tax earnings, meaning the government cannot touch it before the money’s invested. This bumps up the value of your contributions by an estimate 30 percent more.
Capital gains are exempted from tax until you start making withdrawals from the 401(k) account. Getting taxed only from the cash withdrawn or distributed keeps more in your account, which over time can accrue more gains.
There are certain trade-offs to opting for a 401(k) plan. For starters, since the cash is exempted from taxes, account holders are restricted from making withdrawals from their 401(k) until they are aged 59 years and 6 months old. However, this can be overruled during certain conditions, such as the person suffering from an illness and is unable to generate income. If you withdraw money prematurely and do not qualify for any of the exceptions, you will be charged an income tax in addition to a 10 percent penalty fee from the IRS.
Are Stocks the Better Option?
Stocks generally provide the versatility to invest in different assets. If you use a broker account that doesn’t have any tax benefits, you can invest not only in stocks but in government bonds, currencies, commodities, and exchange-traded funds.
Stocks are also more liquid, giving you the ability to close and liquidate positions at any given time. You can withdraw cash whenever needed without getting penalized or having to meet stringent requirements.
The downside to stock investing is the absence of company-matched contributions. Most employers do not match the money you invest in your broker account. In addition, the ROI from stock investments tend to be more volatile and the risk is generally much higher.
As a financially savvy investor, try to build positions on both strategies for growing capital. It is prudent to take advantage of both healthy economies and employer-matched contribution plans to speed up capital growth and distribute risk.
David Milberg is an investment banker from NYC.