401(k) Investment stategies
"You could end up with nothing, yes.  I imagine those that worked at Enron years ago if their 401(k) was all in company stock would have ended up with nothing to give an example here.  However, more likely is for you to end up with less than you thought as you see other choices as being better that with the benefit of hindsight you wish you had made different choices. The strategies will vary as some people will want something similar to a ""set it and forget it"" kind of investment and there may be fund choices where a fund has a targeted retirement date some years out into the future.  These can be useful for people that don't want to do a lot of research and spend time deciding amongst various choices.  Other people may prefer something a bit more active.  In this case, you have to determine how much work do you want to do, do you want to review fund reviews on places like Morningstar, and do periodic reviews of your investments, etc.  What works best for you is for you to resolve for yourself. As for risks, here are a few possible categories: Time - How many hours a week do you want to spend on this?  How much time learning this do you want to do in the beginning?  While this does apply to everyone, you have to figure out for yourself how much of a cost do you want to take here. Volatility - Some investments may fluctuate in value and this can cause issues for some people as it may change more than they would like.  For example, if you invest rather aggressively, there may be times where you could have a -50% return in a year and that isn't really acceptable to some people. Inflation - Similarly to those investments that vary wildly there is also the risk that with time, prices generally rise and thus there is something to be said for the purchasing power of your investment.  If you want to consider this in more detail consider what $1,000,000 would have bought 30 years ago compared to now. Currency risk - Some investments may be in other currencies and thus there is a risk of how different denominations may impact a return. Fees - How much do your fund's charge in the form of annual expense ratio?  Are you aware of the charges being taken to manage your money here?" Ending up with nothing is an unlikely situation unless you invest 100% in a company stock and the company goes under. In order to give you a good answer we need to see what options your employer gives for 401k investments. The best advice would be to take a list of all options that your employer allows and talk with a financial advisor. Here are a few options that you may or may not have as an option from an employer: Definitions from wikipedia: A target-date fund – also known as a lifecycle, dynamic-risk or age-based fund – is a collective investment scheme, usually a mutual fund, designed to provide a simple investment solution through a portfolio whose asset allocation mix becomes more conservative as the target date (usually retirement) approaches. An index fund or index tracker is a collective investment scheme (usually a mutual fund or exchange-traded fund) that aims to replicate the movements of an index of a specific financial market... An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks.[1] An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. The capital stock (or stock) of an incorporated business constitutes the equity stake of its owners. Which one can you lose everything in? You can lose everything in stocks by the company going under. In Index funds the entire market that it follows would have to collapse. The chances are slim here since the index made up of several companies. The S&P 500 is made up of 500 leading companies publicly traded in the U.S.  A Pacific-Europe index such as MSCI EAFE Index is made up of 907 companies. The chances of losing everything in an ETF are also slim. The ETF that follows the S&P 500 is made up of 500 companies. An Pacific-Europe ETF such as MSCI EAFE ETF is made up of 871 companies. Target date funds are also slim to lose everything. Target date funds are made up of several companies like indexes and etfs and also mix in bonds and other investments depending on your age. What would I recommend? I would recommend the Index funds and/or ETFs that have the lowest fee that make up the following strategy for your age: Why Not Target Date Funds or Stocks? Target date funds have high fees. Later in life when you are closer to retirement you may want to add bonds to your portfolio. At that time if this is the only option to add bonds then you can change your elections. Stocks are too risky for you with your current knowledge. If your company matches by buying their stock you may want to consider reallocating that stock at certain points to your Index funds or ETFs.
If it were my money, I wouldn't put it in a 401(k) for this purpose. If you were working at a company that provided 401(k) matching, then it might be worth it to put the money in your employer's 401(k) because the employer chips in based on what you put in. But you're self-employed, so there's no matching unless you match it yourself.  (Correct?) So, given that there's no matching, a 401(k) arrangement would have more restrictions than a non-tax-advantaged account (like a bank account, or a taxable money market account).  This would be taxable in the year you earn the money, but then that's it. If you're expecting to pull out the money pre-retirement, I wouldn't put it in in the first place. "Before anything, I see that no one mentioned the one thing about 401(k) accounts that's just shy of magic - The matching deposit. In 2015, 42% of companies offered a dollar for dollar match on deposits. Can't beat that.  (Note - to respond to Xalorous' comment, the $18K OP deposits can be nearly any percent of his income. The typical match is 'up to' 6% of gross income. If that's the case, the 401(k) deposits are doubled. But say he makes $100K. The $18K deposit will see a $6K match. This adds a layer of complexity to the answer that I preferred to avoid, as I show with no match at all, and no change in tax brackets, the deferral alone shows value to the investor.) On to the main answer - Let's pull out a spreadsheet -  We start with $10,000, and assume the 25% bracket. This gives a choice of $10,000 in the 401(k) or $7500 in the taxable account. Next, let 20 years pass, with 10% return each year. The 401(k) sees the full 10% and after 20 years, $67K. The taxable account owner waits to get the 15% cap gain rate and adjusts portfolio, thus seeing an 8.5% return each year and carrying no ongoing gains. After 20 years of 8.5% returns, he has $38K net. The 401(k) owner on withdrawal pays the 25% tax and has $50K, still more than 25% more money that the taxable account. Because transactions within the account were all tax deferred.  EDIT - With respect to davmp's comment, I'll offer the other extreme -  In his comment, he (rightly) objected that I chose to trade every year, although I did assign the long term 15% cap gain rate, he felt the annual trade was my attempt to game the analysis. Above, I offer his extreme case, a 10% return each year, no trade, no dividend. Just a cap gain at the end. The 401(k) still wins. I also left the tax (on the 401(k)) at withdrawal at 25%, when in fact, much, if not all will be taxed at 15% or lower, which would put the net at $57K or 30% above the taxable account final withdrawal.  The next issue I'd bring up is that the 401(k) is taken out at the top (marginal) tax rate, e.g. a single filer with taxable income over $37,650 (in 2016) would save 25% on that 401(k) deduction. Of course if the deduction pulls you under that line, I'd go Roth or taxable. But, withdrawals start at zero. Today, a single retiree has a standard deduction ($4050) and exemption ($6300) for a total $10,350 ""zero bracket"" with the next $9275 taxed at 10%. This points to needing $500K in pre tax accounts before withdrawals each year would get you past the 10% bracket. (This comes from the suggestion of using 4% as an annual withdrawal rate).  Last - the tax discussion has 2 major points in time, deposit and withdrawal, of course. But, the answers here all ignore all the time in between.  In between, you see that for any number of reasons, you'll drop from the 25% bracket to 15% that year. That's the time to convert a bit of money to Roth and 'top off' the 15% bracket. It can happen due to job loss, marriage with new spouse either not working or having lower income, new baby, house purchase, etc.  Or in-between, a disability put you out of work. That permits you to take money out with no penalty, and little chance of paying even the 25% that you paid going in. This, from personal experience with a family member, funded a 401(k) with 28% money. Then divorced and disabled, able to take the $10K/yr to supplement worker's comp (non taxed) income." According to the 401K information from the IRS' website, it seems that you could seemingly get away with a salary as low as $53,000. It's tough, and I'd suggest speaking with an Accounting professional to get the clear answers, because as Brick's answer suggests, the IRS isn't super clear about it.  An excerpt from a separate page regarding 401K contributions: The annual additions paid to a participant’s account cannot exceed the   lesser of: There are separate, smaller limits for SIMPLE 401(k) plans. Example 1: Greg, 46, is employed by an employer with a 401(k) plan and   he also works as an independent contractor for an unrelated business.   Greg sets up a solo 401(k) plan for his independent contracting   business. Greg contributes the maximum amount to his employer’s 401(k)   plan for 2015, $18,000. Greg would also like to contribute the maximum   amount to his solo 401(k) plan. He is not able to make further   elective deferrals to his solo 401(k) plan because he has already   contributed his personal maximum, $18,000. He has enough earned income   from his business to contribute the overall maximum for the year,   $53,000. Greg can make a nonelective contribution of $53,000 to his   solo 401(k) plan. This limit is not reduced by the elective deferrals   under his employer’s plan because the limit on annual additions   applies to each plan separately. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits There are two significant drawbacks to this type of transfer. They were the reasons why I kept my American 401(k) as-is and started funding my Canadian RRSP from zero balance. 1. Taxes - a large chunk of your 401(k) will be lost to taxes. There is probably no way to transfer the funds without making a 401(k)/IRA withdrawal, which will incur the US federal tax and the 10% early-withdrawal penalty.  When the money went into the 401(k), you got a tax deduction in the US and the tax break is supposed be repaid later when you make a withdrawal (that's basically how tax deferral works).  It's unlikely that any country will let you take a deduction first and send the payback to a foreign country.  The withdrawal amount may also be taxable in Canada (Canadians generally pay taxes on their global income and that includes pensions and distributions from foreign retirement plans).  Foreign tax credit will apply of course, to eliminate double taxation, but it's of little help if your marginal Canadian tax rate is higher than your average US tax rate. 2. Expenses. Your RRSP will have to be invested in something and mutual fund management expenses are generally higher in Canada than in the US.  For example, my employer-sponsored RRSP has a Standard & Poor's stock index fund that charges 1.5% and that is considered low-cost.  It also offers a number of managed funds with expenses in excess of 2% that I simply ignore.  You can probably invest your American 401(k)/IRA in mutual funds more efficiently. This is a purely numerical statement that you should be able to check (and you CPA friend should be able to prove, if true).  The general advice, I think, is that you should not use your retirement funds this way, but general advice does not apply equally well to everyone.   You didn't give enough information for us to compute the answer, so you're on your own there.  If you do this (or have the CPA do it), make sure that it accounts for all pluses and minuses that you'll have.  On the minus side, you get any direct penalties in addition to potential loss of right to contribute for a period of time, so make sure you consider both aspects, especially to any degree that you would lose an employer contribution or match.  Also consider the fact that the money already in is tax advantaged, and you won't be able to replace that amount later.  So there will be a compounding effect to what was lost. (This may or may not be balanced by a mortgage interest deduction down the road - My guess is that it will not, but, again, the details of your situation may dictate a different path.  The mortgage interest deduction decreases each year as you pay more principal whereas the compounding from being tax deferred tends to increase each year.) "I used the term ""bond fund"" to mean a mutual fund which invests in bonds. Vanguard has a list.  If you live in PA, OH, MA, FL, CA, NJ, or NY there are tax free funds you can invest in on that list." "Your employer sends the money that you choose to contribute, plus employer match if any, to the administrator of the 401k plan who invests the money as you have directed, choosing between the alternatives offered by the administrator. Typically, the alternatives are several different mutual funds with different investment styles, e.g. a S&P 500 index fund, a bond fund, a money-market fund, etc.  Now, a statement such as ""I see my 401k is up 10%"" is meaningless unless you  tell us how you are making the comparison. For example, if you have just started employment and $200 goes into your 401k each month and is invested in a money-market fund (these are paying close to 0% interest  these days), then your 11th contribution increases your  401k from $2000 to $2200 and your 401k is ""up 10%"". More generally, suppose for simplicity that all the  401k investment is in just one (stock) mutual fund and that you own 100 shares of the fund as of right now.  Suppose also that your next contribution will not occur for three weeks when you get your next paycheck, at which time additional shares of the mutual fund will be purchased Now, the value of the mutual fund shares (often referred to as net asset value or NAV) fluctuates as stock prices rise and fall, and so the  401k balance = number of shares times NAV changes in accordance with these fluctuations. So,  if the NAV increases by 10% in the next two weeks, your 401k balance will have increased by 10%.  But you still own only 100 shares of the mutual fund. You cannot use the 10% increase  in value to buy more shares in the mutual fund  because there is no money to pay for the additional shares  you wish to purchase.  Notice that there is no point selling some of the shares (at the 10% higher NAV) to get cash  because you will be purchasing shares at the higher NAV too. You could, of course, sell shares of the stock mutual fund at the higher NAV and buy shares of some other fund available to you in the 401k plan.  One advantage of doing this inside the 401k plan is that you don't have to pay taxes (now) on the 10% gain that you have made on the sale. Outside tax-deferred plans such as 401k and IRA plans, such gains would be taxable in the year of the sale.  But note that selling the shares of the stock fund and buying something else indicates that you believe that the NAV of your stock mutual fund is unlikely to increase any further in the near future. A third possibility for your 401k being up by 10% is that the mutual fund paid a dividend or made a capital gains distribution in the two week period that we are discussing.  The NAV falls when such events occur, but if you have chosen to reinvest the dividends and capital gains, then the number of shares that you own goes up.  With the same example as before, the NAV goes up 10% in two weeks at which time a capital gains distribution occurs, and so the NAV falls back to where it was before.  So, before the capital gains distribution, you owned 100 shares at $10 NAV which went up to $11 NAV (10% increase in NAV) for a net increase in 401k balance from $1000 to $1100. The mutual fund distributes capital gains in the amount of $1 per share sending the NAV back to $10, but you take the $100 distribution and plow it back into the mutual fund, purchasing 10 shares at the new $10 NAV.  So now you own 110 shares at $10 NAV (no net change in price in two weeks) but your 401k balance is $1100, same as it was before the capital gains distribution and you are up 10%.  Or, you could have chosen to invest the distributions into, say, a bond fund available in your 401k plan and still be up 10%, with no change in your stock fund holding, but a new investment of $100 in a  bond fund. So, being up 10% can mean different things and does not necessarily mean that the ""return"" can be used to buy more shares." "The bond funds should tell you their duration. My 401(k) has similar choices, and right now, I'm at the short maturity, i.e. under 1 year. The current return is awful, but better than the drop the longer term funds will experience as rates come back up.  Not quite mathematically correct, but close enough, ""duration"" gives you the time-weighted average maturity in a way that tells you how the value responds to a rate change. If a fund has a 10 year duration, a .1% rate rise will cause the fund value to drop 1.0%."