I'm still learning about investing and want to know if I should invest in 401(k) or is it better to invest by yourself in stocks? Or do both? Can you pick your own stocks with 401(k)?

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    The problem with this question is that there is no such thing as a typical 401(k). Some companies have very good offers which would be stupid to ignore. Others just offer a sorry excuses for a retirement plan which you can just as well do on your own.
    – Philipp
    Nov 23, 2020 at 12:51
  • Welcome to Money.SE. If you'd really like some priceless advice, please tell us: What is the annual expense on the 401(k) S&P fund option? What is your current tax bracket? Is there a 401(k) Roth option? Last, age/marital status? Personal finance is just that, personal. These are the minimum details to get you a decent answer. (Your profile says "Europe". Are you moving to the US?) Nov 23, 2020 at 12:55
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    @Philipp - you are too kind. There are some where 'sorry excuse' = 'criminally high fees'. A bad 401(k) is worse than none at all. A good one (super low fee, and high match) is a wonderful benefit that should be taken advantage of. Nov 23, 2020 at 12:56

3 Answers 3


The answer, of course, is "it depends". It depends on your income & tax situation, the investment options and employer matches of your particular 401k, and your personal goals.

The key point here is that 401k and IRA accounts* are intended as long-term retirement savings plans. As such, they have tax advantages (investments are before tax, and taxes are only due when money is taken out of them) and possible employer matches. That means that you are probably getting a bunch of "free money" that you wouldn't get with regular investments. The downside of this is that you will generally pay a fairly large penalty if you take money out before retirement age (59 1/2, IIRC).

With personal investing, the situation is reversed. Any money you invest is after tax, and if you do trading in your account, you will be paying tax on capital gains & dividends every year. OTOH, the money is yours: you can take it out at any time (but have to pay capital gains tax) and use it for any purpose you like.

My own opinion (and what I have actually done) is that if you have sufficient income, put as much as you can get the employer match on into a 401k (if you're an employee), or as much as is tax deductible into an IRA. Then invest in mutual funds on your own.

*I'm not discussing Roth-style accounts here.


A 401(k) is a retirement account through your employer. Some 401(k) programs also include a Roth option. There are similar program to a 401(k) if your employer is the Federal government (TSP) or public education (403(b)).

Inside the 401(k) you generally have a list of mutual funds to invest in. Some are stock funds, some a bond funds. Some of these funds focus on US based investments, some are international. Some can even invest in real estate. Some funds are a blend of these different options.

In some 401(k) programs you can buy company stock. Of course that option only exists if the employer has shares, not all do.

In some programs you can invest in individual stocks.

You need to get the plan information from your employer, to see the exact options they offer.

Many people pick a 401(k) or IRA because of tax issues, or in the case of the 401(k) the employer may match some of their investment.


My recommendation, since you are just starting out, would be to put 100% of your contributions into an S&P 500 index fund.

This works well for portfolios that are small (< 100K), if you are young (<30 years old), and have a tolerance for risk. Also this assumes that your company 401K has a low cost (< 1% per year fees) S&P 500 index fund.

Eventually you will want to move to a bit more sophisticated asset allocation model, but for the conditions described above, doing 100% S&P 500 index fund works just fine.

The key thing is to just get started. Many new investors allow the fear of making a sub-optimal decision preclude them from investing. Don't let that be you. Its much better to have your money make some money then none at all.

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    First. The question is too broad. There are layers of it that need to be pulled apart, and 2-3 questions addressed. Index vs Stock picking. 401(k) vs external investing, etc. Second, in my opinion, 1%/yr fee is now "criminally high". Consider, after the match, the benefit is the deposit at 22% bracket/Withdrawal at 12%. Right? So, a 1% fee negates the entire benefit over 10 years. I retired after nearly 30 years and the one real investing regret was depositing post match. 401(k) turns LT gains into ordinary income, and has other phantom rate results as well. Nov 23, 2020 at 12:48
  • @JTP-ApologisetoMonica " I retired after nearly 30 years and the one real investing regret was depositing post match." You just blew my mind with that statement. Converting LT gains into ordinary income kind of makes a case for Roth though, doesn't it? Or, another way, isn't the Roth still better than just investing on your own if you haven't maxed the 401k yet?
    – TTT
    Nov 23, 2020 at 21:33
  • @JTP-ApologisetoMonica or are you suggesting that even in a Roth, the higher fee over many years is worse than the total tax paid?
    – TTT
    Nov 23, 2020 at 21:40
  • @TTT - The Roth benefit is that it grows tax free. If the accumulated fees are greater than the tax saved, then yes, the plan is bad enough that it should be avoided. The Roth is excellent if the fees are not criminal. There are still companies with fees that way too high. Nov 23, 2020 at 23:43
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    typo. fixed. from 22% to over 30% as a phantom rate. sorry, long day. Next time I'm in my tax software, I might edit to give some precise details. Nov 24, 2020 at 0:01

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