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Of all of the various employee benefits, 401(k) plans are right up there with health insurance as the most important. But what do you do if you’re unhappy with your 401(k) plan? You may think that your only choice is to hold your nose and make the best of it. But you can actually develop a strategy that will help you to create better options, and improve your overall retirement picture in the process.

Let’s take a look at the choices that you have.

Work Around Your Investment Options Within Your Plan

401k plan options

Are you unhappy with your 401k plan options?

Every 401k plan should have some basic investments that will satisfy a portion of every investment portfolio. Common examples include low-cost index funds that tracks a segment of the broader stock or bond market. If some of these options will work as part of your broader investment portfolio, then be sure to rebalance your assets to take advantage of the funds you have available to you in your 401k plan.

An easy way to do this is by signing up for a free account with Personal Capital, or with FutureAdvisor. These accounts make it easy to link your investment accounts to their software (it’s safe), and then analyze your entire portfolio. This information makes it easy to rebalance your portfolio to meet your investment goals and risk tolerance.

Limit Your Participation in the Plan

If you are unhappy with your 401(k) plan because investment choices are poor, transaction fees are excessive, and there’s no employer matching contributions, you can build a plan without putting money into specific investments. By doing this, you can choose to use your 401(k) plan mostly as a warehouse for your retirement assets.

Most plans offer a cash or cash equivalent option. This can include money a market fund or some kind of short-term bond fund. The idea is to hold your money in the least expensive, and lowest risk options. Your primary effort will be to build your plan to be as large as possible, and to preserve your capital for future investment opportunities.

On the surface, it seems that you’ll be leaving investment income on the table by keeping your money in cash or cash equivalents. But given the fact that most people today stay on their jobs only a few years, what you’ll really be doing is preparing your plan for a rollover.

Once you leave the company, you’ll be free to withdraw money from your 401(k) plan, and roll it over into your IRA, or a hopefully better 401(k) plan at your next employer. Think of it as a strategy based on keeping your powder dry until better opportunities present themselves.

Opt Out Completely

You always have the option not to participate in the company’s 401(k) plan. By opting out, you open up the possibility of gaining tax deductibility on a self-directed IRA account, or allow yourself more of your paycheck to invest in non-retirement vehicles. Just be sure that if you opt out, you have other investment options waiting.

Traditional and Roth IRAs

These accounts are worth having even if you have a 401(k) plan at work. Even if you won’t be able to deduct your contributions, a self-directed traditional or Roth IRA will give you the widest possible choices of investments. You’ll be able to invest in individual stocks, if that’s your choice.

And if the contributions are not tax-deductible, the earnings in either type of account will still grow on a tax-deferred basis nonetheless (or tax-free, in the case of the Roth).

There is also an important retirement tax diversification aspect to being either in a Roth IRA, or a non-deductible traditional IRA. The money put into these accounts can be withdrawn in retirement free from taxation, because no deductions were available at the time you contributed money. This will give you a valuable source of non-taxable retirement income, at a time when your tax rate may be higher than you currently anticipate.

Non-Retirement Investments

While tax-deferred retirement accounts have definite advantages, there’s nothing in holy writ that says that all of your retirement assets have to be sitting in qualified plans. Any investment assets that you have can provide you with income in retirement.

Of course, there will be no short-term tax advantages to putting money into non-sheltered plans. But you still save and invest money, and even get an income tax benefit that comes from long-term capital gains.

The biggest advantage of non-sheltered plans is the freedom to withdraw your investments at any time, while limiting your tax consequences. You will not have to wait until you reach age 59½ before accessing your funds. Since income taxes have been paid on the investment income when it was earned, and no tax break was provided on the money contributed, you’ll be able to withdraw as much as you want without having to worry about any tax consequences, save those from capital gains or losses. And along the way, you’ll have complete control over your investments.

For this reason alone, non-tax sheltered investments should always be held in conjunction with qualified plans as a matter of course.

Side Business with a Dedicated Retirement Plan

If you have an entrepreneurial streak, this can provide a viable alternative to an employer-sponsored 401(k) plan. By starting your own business as a side venture, you can also add a solo 401(k) plan, that will allow you to save for your retirement out of your business income.

A solo 401(k) plan will enable you to save up to $17,500 per year, or $23,000 if you are 50 or older. And you can contribute up to 100% of your income up to those maximums, which will enable you to save a lot of money on a relatively small income. And it has provisions that will allow you to exceed the maximums too, with a profit sharing plan from your business.

This deduction must be combined with any contributions you make your employer-sponsored 401(k) plan. That being the case, you can decide to contribute say, $8,750 (50% of the maximum) to your solo 401(k), and the balance your employer 401(k). Alternatively, if you’re earning enough income from your side business to make the maximum contribution, you can put the entire contribution into your solo 401(k), and opt out of your employer sponsored plan.

There’s no need to feel trapped if you’re not satisfied with your employer-sponsored 401(k) plan. Consider these and other options, and do what you feel you need to do.

Photo Credit: Jason Tester Guerrilla Futures

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