401(k) Investment Options: Which Ones Are Right for You?

Do you know which 401(k) investment options are best for you? Here’s a quick guide to help you decide.

Roth vs. Traditional 401(k)

Choosing a Roth 401(k) means that you pay taxes on your income now, but when you take the money out in retirement, it’s tax free. In contrast, a traditional 401(k) postpones taxes on the income you invest* until decades later, when you retire. The option that’s right for you depends on how you think your retirement tax rate will compare to the tax rate you pay now. If you expect to have a lot of investment* earnings later in life, for example, a Roth 401(k) will cut your total tax bill. But if you expect your income to scale back in retirement, you’re typically better off with a traditional 401(k).

Choosing Investments*

Once you’ve decided which type of 401(k) to go with, it’s time to choose investments. Most 401(k)s offer a mix of index funds and mutual funds, and they sometimes offer other investments like real estate funds. Don’t worry — you don’t have to pick just one! In fact, you should spread your money across different options so that you’re less at risk in case any particular investment loses value.

Index Funds

But what are index funds? An index fund is a type of mutual fund calibrated to reflect the overall growth of a specific market. For example, Standard & Poor’s 500 index tracks the general movement of the U.S. stock market. Other index funds are built around certain international markets or companies with traits in common. For example, an index fund may be a mix of “mid-cap” companies, or firms worth $2-10 billion.

The advantage of stocks is that they can greatly increase in value, especially if you hold on to them for several decades over your career. The downsides are that you may not see those gains for several years and that stocks can also lose a lot of value. That’s why people who are due to retire soon or who want to avoid risk often don’t invest* heavily in stocks. But people who have a lifetime of investing ahead of them may want to buy stocks to earn higher returns. Financial advisors recommend that 25-year-olds have 80 to 90 percent of their investments* in stocks.

Bond Funds*

Your 401(k) likely also gives you the choice to invest in bonds, generally through bond funds. Bonds are usually a safer investment than stocks because they pay reliable rates of interest and their value tends to be stable. The flip side of that stability is that you can’t expect an investment in bonds to appreciate drastically. Bonds are one of the better 401(k) investment options if you’re nearing retirement or are trying to keep risk to a minimum. If you’re younger or looking to take more chances with your investments, you’ll still want to own some bonds, but they’ll make up a smaller part of your portfolio.

Target Date Funds*

Target date funds (TDFs) are designed for people who expect to retire at a specific year in the future. TDFs invest in stocks and bonds, shifting emphasis toward bonds as you approach your retirement date. A TDF may be right for you if you want a hands-off approach, letting the fund balance your investments to gradually decrease your exposure to stocks. However, a target date formula assumes that this fund is your main investment. So if you already own significant stocks or bonds and want to hold onto them, a TDF probably isn’t your best option.

Sorting through your 401(k) investment* options can be overwhelming. But it’s essential not to put off saving for retirement. Sign up today and get started on your way to a comfortable retirement.

Investment products are offered through Key Investment Services LLC (KIS), member FINRA/SIPC. KIS is affiliated with KeyBank National Association (KeyBank). Investment products made available through KIS are:

KIS Disclosure

KIS and KeyBank are separate entities, and when you buy or sell securities you are doing business with KIS, and not KeyBank.

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