Should You Invest in a 401(k) If You Don't Get a Match?

For millions of workers, there is no easier way to save for retirement than contributing to a 401(k) plan. Set up by employers, these investment accounts allow participants to automatically deposit money from their paycheck. To sweeten the deal, some companies will even partially or fully match worker contributions to a 401(k).

"People call it free money," says Scott Dougan, co-founder of the financial education program Retirement Elevated. "To me, it's not free money. It's already calculated into a compensation package." That means workers who don't claim a match are essentially missing out on a portion of their income.

Contributing to a 401(k) when there is a match is a logical choice. However, the issue becomes murky for those who work someplace where there is no employer match. The 401k Performance Survey, conducted by American Investment Planners, found that 42 percent of businesses didn't offer a match in 2011. In those cases, finance experts like Dougan say workers need to consider several factors before deciding where to put their retirement money.

The Case for Investing in a 401(k)

Even without a match, a 401(k) remains an attractive way to invest for retirement.

Employers have a legal responsibility to ensure a 401(k) operates in the best interests of workers. In other words, a company must set up a plan in such a way to ensure reasonable fees and diverse investment options.

Besides providing stable investment funds, a 401(k) is accessible, even for those who don't feel financially savvy. "Because it comes out of payroll deductions, it's easy and simple," says Nathan Boxx, associate financial consultant at Fort Pitt Capital Group in Pittsburgh.

Finally, for higher income households, a 401(k) plan may be the only option if they want to deduct contributions from their taxes. The ability to deduct contributions to a traditional IRA begins to phase out for single workers once they reach $61,000 or more in annual income. For couples, the phase-out begins at $98,000.

Another plus for high-income households is the contribution cap for 401(k)s. Workers can invest up to $18,000 per year in their plan in 2015 and 2016. Those older than age 50 can put in an additional $6,000 per year. Traditional IRAs, on the other hand, limit annual contributions to $5,500 for workers under age 49 and $6,500 for those age 50 or older.

Why You May Want to Put Your Money in an IRA

Although 401(k) plans have a lot going for them, they may not be right for everyone. The key is to look at your options, says Ann Summerson, a certified financial planner and vice president of The Wise Investor Group in Reston, Virginia.

401(k) plans may have diverse options, but workers could find more choices and even lower rates by taking their money to an IRA. "Some employers may have higher fees," says AJ Smith, managing editor of the finance site SmartAsset.com. "You want to be sure your money is working for you and not going to administrative fees."

Tax planning should also play a role in determining whether to put money in a 401(k) or IRA. "There's this misconception that we should pile as much money as possible in a [traditional] 401(k) or IRA to lower our taxes now," Dougan says.

Instead of focusing on current taxes, Dougan advises workers to consider how much they may pay in taxes during retirement. He predicts taxes rates will increase in the years to come, and that means money would be better invested in Roth 401(k) or Roth IRA. Traditional 401(k)s and IRAs allow workers to deduct contributions from their current year taxes. Then, when they withdraw money in retirement, it is taxed as income. With Roth accounts, contributions are not tax deductible now, but withdrawals in retirement are tax exempt.

According to the Vanguard Group, 56 percent of employers offering 401(k) plans managed by their company have a Roth option. However, those working somewhere with neither a 401(k) match nor a Roth 401(k) may want to put their money in a Roth IRA, which anyone can contribute to.

Ultimately, financial experts say which retirement account you choose is less important than simply saving money. Summerson says if a 401(k) is the easiest way for people to save, they shouldn't dismiss the option simply because they don't get a match. She puts it this way: "Is your employer saving for your retirement, or are you saving for your retirement?"