If you’re focused on preparing for your financial future, you probably know you’re ahead of the game. And while socking away your hard-earned cash for a later date may not seem particularly fun, it is important. First, it’s a good idea to calculate how much money you need to save for retirement. Then you can figure out the strategy that makes the most sense for you. While you may often hear that a 401(k) is the best way to reach retirement goals, there are certain times it doesn’t make sense.
No Financial Safety Net
401(k) plans are designed for retirement. Once you’ve contributed money to them, if you need to access that money before retirement, you often have to pay taxes and penalty fees. For this reason, it’s a good idea to have a separate fund for emergencies. It’s generally a good goal to have three to nine months’ worth of expenses in cash that is easy to access. The exact amount you need will depend on your job security, income needs and other factors. So before you start diverting all your savings to your 401(k), it’s a good idea to make sure you have a separate emergency fund.
Between plan administration fees, investment fees, individual service fees, sales charges and management fees, some 401(k) plans will cost more than you expect. You may not even be making enough in interest to negate these fees.
Too Much Debt
If you are deep in debt, you may be paying hundreds of dollars in interest each month. It’s a good idea to run the numbers on interest versus returns and consider your options. This means the money going straight from your paycheck to your 401(k) (or at least part of it) might be better used to pay down debt. (You can get two of your credit scores for free on Credit.com to see how your debt is affecting your credit.)
No Employer Match
When your 401(k) does not feature an employer match, you may have more plan options if you set up your own IRA. If you are not one of the lucky people who works for a company that matches your contributions up to a certain amount and thus receive no “free money,” you may be able to choose a lower-fee IRA instead. Depending on your income, a traditional IRA may be tax-deductible, as a 401(k) is. (A Roth IRA would not be.)
Part of the allure of 401(k) plans is the option to defer income tax until you start taking money out. If you are worried that you will shift up to a higher tax bracket when you retire or do not like the lack of stability in tax rates, you might prefer a Roth IRA. This kind of retirement account allows you to contribute after-tax dollars.
When it comes to boosting your retirement nest egg, it’s important to do some research and find out the best way to reach your own financial goals.
This article originally appeared on Credit.com.