Most workers do at least some of their retirement saving outside of a 401(k). Only 14 percent of current workers save for retirement using only an employer-sponsored retirement account, according to a recent survey of 1,067 employees by Principal Financial Group and Harris Interactive. Most worker’s (53 percent) current 401(k) balance is less than half of their total retirement savings. Another 22 percent of the employees surveyed have at least some money earmarked for retirement outside their workplace retirement account.
There can be tax benefits in retirement for those who keep some of their retirement investments outside of tax-deferred accounts. Regular income tax is generally due on withdrawals from traditional 401(k)s and IRAs. Equities held outside of retirement accounts are taxed at the typically lower capital gains tax rate. “It’s better to have your fixed income assets in your tax-deferred accounts and your equity assets in your taxable accounts because you get the capital gains tax rate,” says David Loeper, CEO of Wealthcare Capital Management and author of Stop the Retirement Rip-off: How to Avoid Hidden Fees and Keep More of Your Money. “The last thing you want is stock being taxed at ordinary rates.”
However, it appears that most people are not saving outside their 401(k) for the tax break. Those who have retirement savings beyond their employer-sponsored account were most likely to have their nest egg safely tucked into a savings account (48 percent). Many workers also sought out the tax-deferred benefits of a traditional IRA (22 percent) and the post-tax earnings of a Roth IRA (24 percent). Other places workers are saving for retirement include CDs (20 percent), brokerage accounts (19 percent), and variable annuities (6 percent).