It’s hard to argue with the benefits of saving for retirement in an employer-sponsored retirement plan such as a 401(k) or 403(b).

Saving is easy since contributions are taken automatically out of your paycheck. You get a tax break now since you make contributions pre-tax. Your money grows tax-free. And the biggest bonus is this: Your employer may also match part of your contribution, which is essentially like getting free money for your future.

So it’s no wonder that employees love these plans. Of the 80 percent of large companies in America that offer a defined contribution plan to their full-time employees, the American Benefits Council reports, the majority of people — 80 percent — participate.

But is it possible to have too much of a good thing? The answer is yes — if your 401(k) is your only type of retirement savings account. Here’s why.


    When you begin making withdrawals from your 401(k) in retirement, you’ll have to pay taxes on that income, which can be risky for a couple of reasons. First, between now and the time you retire, you don’t know how high your earnings might grow; you could be in a higher tax bracket in retirement than you are today. And second, it’s impossible to predict what the tax environment in the country will be by then. So if all of your savings is subject to unknown future tax circumstances, you may end up in retirement with much less purchasing power than you planned.


    People in the financial services industry often talk about asset allocation as an important way to make sure your investment eggs aren’t all in one basket. The same holds true for retirement income. Let’s call it asset location. When you spread your savings across different types of taxable and non-taxable accounts, you give yourself flexibility in retirement to combine various streams of income in a way that allows you to minimize taxes and maximize income.

    For example, let’s say one year in retirement you’re inching close to the top of the 25 percent tax bracket, and you want to draw additional income to make a major purchase. If you pull the extra money from a taxable asset, you may inadvertently bump yourself into the next higher tax bracket — increasing your overall tax liability. But if you could augment your income with tax-free money, you could avoid moving to a higher tax bracket.


    It’s hard to get access to the money in your 401(k) before the age of 59½ without paying stiff penalties and taxes, and that’s by design. These accounts were established by the federal government to encourage people to save for retirement and discourage them from raiding their nest egg to finance other goals or to cover unexpected expenses. So some of your savings needs to be in other types of accessible accounts.

    For all these reasons, it’s important to think beyond your traditional employer-sponsored plan when saving for retirement. So, what should you consider? At minimum, contribute enough to your 401(k) to get your company’s match if one is offered. After that, talk with your financial professional about your other options:

    People in the financial services industry often talk about asset allocation as an important way to make sure your investment eggs aren’t all in one basket. The same holds true for retirement income.

    • A Roth IRA or Roth 401(k): In each of these Roth accounts, you make contributions with after-tax money, so your withdrawals (and gains) are tax-free in retirement. Roth IRAs have an income restriction; you can contribute only if you earn up to a certain amount of annual income. For a couple that is married filing jointly, the income limit is $199,000. By contrast, a Roth 401(k) has no income restrictions; you can contribute even if you’re a higher-income earner.
    • Non-qualified investments: While these accounts don’t enjoy the same tax benefits as qualified accounts, like 401(k)s or IRAs, they also don’t have as many restrictions. You will have more flexibility to access your savings prior to retirement. Non-qualified investments may also be a great option if you have already maxed out the amount you are contributing to your qualified accounts.
    • Life insurance: While the primary purpose of life insurance is to provide a death benefit, permanent life insurance policies build equity (known as cash value) over time that can provide a source of income1 you can use to help meet other goals, including supplementing your retirement income.

The more options you have in retirement, the better. Your 401(k) or 403(b) will give you a great start, but don’t let it be your only retirement savings vehicle. When you have a choice of assets to draw from — both taxable and non-taxable — you’ll be giving yourself added financial flexibility and making the most of your income in retirement.

All investments carry some level of risk including the potential loss of principal invested.

1 Utilizing the cash values of permanent life insurance policies through policy loans, surrenders of dividend values or cash withdrawals will or could reduce the death benefit, necessitate greater outlay than anticipated or result in an unexpected taxable event. Policyowners should consult with their tax advisors about the potential impact of any surrenders, withdrawals or loans.

This article was updated on April 5th, 2018 to reflect a higher Roth IRA income limit.

Recommended Reading