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An increasing number of savers are rejecting retirement accounts in favor of these investments

MarketWatch logo MarketWatch 5/16/2018 Alessandra Malito

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More people are stashing their money in taxable accounts and less so in employer-sponsored retirement plans.

Ownership of taxable brokerage accounts jumped 10 percentage points over the last five years, and checking, saving and CD accounts increased 9 percentage points, according to retail investor data firm Hearts & Wallets. Meanwhile, ownership rates remained the same for employer-sponsored plans like a 401(k), but consumers were contributing less — a total decline of 5 percentage points.

See: Most Americans distrust their 401(k) plan providers

Accounts with specialties, like Roth retirement plans (where money is taxed first, and then withdrawn “tax-free”) and 529 plans for higher education expenses, are also in demand, said Laura Varas, chief executive officer and founder of Hearts & Wallets. Ownership of college savings plans increased from 8% to 11% over the last five years, though the amount of money in those plans dropped from 28% to 19%.

Why? Because consumers want money quickly available in the event of emergencies, or for other nonretirement life goals, such as funding children’s education or medical emergencies. They don’t want to face fees or penalties for using money they have saved in plans that aren’t meant to be touched for another few decades. “When you think of the welfare of consumers, to encourage people to tie up assets until 20, 30, 40 years later is bad advice,” Varas said.

There might be some good news: By choosing liquid assets, people are funding their emergency accounts more. About 40% of Americans (or 48.7 million) have three or more months of income saved in a checking, savings or CD account, and if taxable brokerage accounts are included, that number jumps to 49% (or 61.6 million) of U.S. households. Varas said people should think of emergency savings and rainy day funds differently as well — the former for unexpected expenses, like car repairs, and the latter in the event of a family member losing a job, and that not all of it should be in cash. Regardless what you call it, such an account is necessary — another report from the Federal Reserve’s annual economic well-being of U.S. households found half of Americans don’t have enough to cover a $400 emergency.

Also see: This is the real reason many Americans stay poor

This doesn’t mean people should avoid 401(k) plans, but there are other ways to save for retirement, such as individual retirement accounts (Roth or traditional). Roth plans have become more attractive under the new tax law, as people can invest their money in these plans at a lower interest rate than they may be in the future when these investors are ready to retire.

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