Don’t Think About Your 401(k) in Isolation


401(k) accounts can seem a bit strange. Unlike most other financial accounts where you can invest your money, your 401(k) account is tied to the company you work for. You can’t move your 401(k) account to a different financial institution (at least not while you’re still working for same employer) and (like some other types of retirement accounts) you generally can’t withdraw money from a 401(k) before the age of 59 ½ without incurring penalties. Yet just because your 401(k) account is different from other accounts doesn’t mean you should think about it in isolation.

If you have multiple accounts that you’re using to invest for retirement—whether they’re 401(k) accounts, IRA accounts, or regular brokerage accounts—thinking about each account as if the others don’t exist can be a mistake. Even if the allocation of your investments is reasonable in each account individually, it might not be ideal when your accounts are considered together. For example, a sizable exposure to a particular stock, fund, or sector of the market might not be a problem in one specific account. But if you have that same exposure across all of your accounts, it might put your ability to reach your retirement goal at risk.

Furthermore, only thinking about your accounts individually precludes some clever tactics that could help grow your wealth. If you’re investing for retirement with a mix of tax-advantaged accounts such as 401(k) accounts and regular taxable accounts, you might be able to use what’s called “asset location” to reduce your tax bill. Because income from different types of investments is taxed differently, the idea of asset location is to put more of the high-tax investments in the tax-advantaged accounts and the low-tax investments in the taxable accounts. Done properly, it can let you retain more of your wealth. But asset location requires that you think about your “retirement goal” as a single entity rather than as isolated accounts.