There are various disadvantages of retirement investment vehicles and it is important to get acquainted to the demerits so that we will know how to undergo the retirement plan.
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There are various disadvantages of retirement investment vehicles and it is important to get acquainted to the demerits so that we will know how to undergo the retirement plan.
Here are some potential disadvantages of common retirement investment vehicles: 401(k) plans: - Limited investment options - Typically restricts you to funds chosen by employer's plan. May lack diversity. - Account fees - Administration fees and fund expense ratios can chip away at returns. - PenaltRead more
Here are some potential disadvantages of common retirement investment vehicles:
401(k) plans:
– Limited investment options – Typically restricts you to funds chosen by employer’s plan. May lack diversity.
– Account fees – Administration fees and fund expense ratios can chip away at returns.
– Penalties for early withdrawal – Taking money out pre-retirement results in taxes/penalties.
– Required minimum distributions – Force you to take taxable distributions after age 72 whether you need to or not.
IRAs:
– Lower contribution limits – IRA contribution limits are much lower than 401(k)s, limiting tax-advantaged savings.
– No employer match – IRAs don’t come with valuable employer matching contributions.
– Income limits – Tax deductibility is phased out at higher incomes for traditional IRAs.
– Mandatory withdrawals – Same required minimum distribution rules as 401(k)s.
Annuities:
– High fees – Surrender fees and mortality/expense charges can be very high.
– Tax treatment of gains – Earnings are taxed at ordinary income rates rather than lower capital gains rates.
– Restricted access to money – Getting funds can be difficult depending on type of annuity.
– No step-up in basis – Assets don’t get basis stepped up upon inheritance like other accounts.
The key is to understand the limitations of each vehicle to construct an optimal overall retirement portfolio. Working with a financial advisor can help identify the best options given your individual financial situation and goals.
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