Is Your 401(k) Enough?

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Since its inception in 1978, the 401(k) has become one of the most common retirement savings vehicles used by Americans.

According to the Investment Company Institute, the trade association for regulated fund companies, more than 60 million active and retired American workers have deposited $7.4 trillion in their 401(k) accounts as of December 2023.

But while a 401(k) can be a solid piece of a retirement savings plan, all by itself it may not be enough to help you reach your financial goals. One reason is that 401(k) accounts offer limited investment options — typically a mix of stock and bond mutual funds — that may restrict your choice of investment vehicles. And since a 401(k) is tied to your job, you won’t be able to contribute if your employer does not offer one or if you spend any time out of work.

Maximizing your contributions to your 401(k) plan is almost always a great idea. But broadening your strategies beyond what’s offered by your employer can help augment even the best 401(k) plan and give you more options to accumulate assets as well as protect them.

Options to augment your 401(k)

Individual Retirement Account: In 2024, a regular IRA allows you to sock away $7,000 a year ($8,000 if you’re 50 or older), as long as you earn at least that much. The money is untaxed until you start making withdrawals. You get tax-free growth and a tax deduction in the year you make contributions. IRAs also may be protected in bankruptcy and can be passed to heirs. Your investment choices are nearly unlimited, especially if you use a self-directed IRA, which can invest in real estate, businesses and other assets beyond mutual funds.

But be aware that you can’t touch the money before age 59-1/2 and the account must be at least five years old, or you may pay a significant penalty, plus taxes. Once you stop working, you can’t make new contributions.

Roth IRA: This functions like an IRA, but you contribute after-tax dollars, so you don’t get a deduction. But while you do pay tax on your contributions, you can get tax-free earnings on all your money. As with a regular IRA, you can’t withdraw earnings before age 59-1/2 and until five years after the account is opened. However, you can withdraw your contributions at any time, making this a good account for young savers who might hit a rough patch. However, you may have to pay taxes and penalties on earnings in your Roth IRA.

Your contributions to a Roth IRA are combined with contributions to any regular IRAs under the same annual limit — $7,000 a year, with another $1,000 if you’re older than 50. Early withdrawals of earnings also may face a 10-percent penalty, plus taxes.

Life Insurance: Universal, permanent or whole life insurance is an option for those who have maxed out contributions to other tax-deferred accounts, such as 401(k) plans. Insurance policies can include several different financial planning options, as well as tax benefits, and the death benefit can be an important estate-planning tool. Policy owners can take loans against their policies, giving them more financial flexibility. You also can keep most policies for your entire life, unlike term policies that expire after a fixed period.

The premiums for universal, permanent or whole life insurance are typically higher than a simple fixed-term life insurance policy, and you’ll want to check to see if a policy contains additional fees and charges.

Another option is indexed universal life insurance. This type of insurance policy pays a death benefit and builds cash value, like regular whole life insurance, but ties its return to a standard benchmark index, such as the S&P 500. Premiums and the death benefit can be adjusted based on your needs, compared to typical whole life policies while offering the potential for larger gains. Cash value can be withdrawn at any time without penalty, policyholders can take loans at any time, and the death benefit is permanent. The death benefit is reduced by any outstanding loans, and interest is charged on loans.

If the benchmark index that the policy is tied to declines, policyholders may see little, if any, profit and, as with any policy, returns will lag the underlying index. Be aware that some policies cap the amount of gains.

While a company 401(k) plan can be an easy and effective way to start saving for retirement, additional strategies can offer a mix of options, tax benefits, lower fees and benefits to help build a robust financial future.

A financial advisor can help you determine which of these strategies may be right for achieving your financial goals.

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.

Not all Mutual of Omaha agents are registered representatives or financial advisors.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.