Having enough money in retirement often requires decades of careful planning, saving and investing. For many Americans, retirement planning goes through their employers through 401(k) plans.
These vehicles allow employees to direct a portion of their salary into tax-advantaged investment accounts that they can withdraw upon retirement. Approximately 60 million people in the United States actively participate, according to the Investment Company Institute (ICI).
But even though employers take care of the heavy lifting of setting up these plans and offer perks like company matching, individuals still need to manage their 401(k)s in a way that prepares them for the retirement success. If you don’t use the account properly, you risk not saving enough or paying unnecessary fees and penalties.
If you’re looking to explore your retirement options — or want to renew an existing 401(k) — then Consider the Benefits of a Roth IRAtoo.
For current 401(k) participants, however, be sure to watch out for these three common mistakes:
1. Missing the game
You might feel like you don’t have enough money to save in your 401(k), but think twice about declining the company match. A match means your employer will put the same amount into your 401(k) as you, usually based on a maximum percentage of your salary,
“Many 401(k)s have an offset of 3% of employer compensation or more, so if you don’t defer at least that amount, you’re simply choosing to decline free money,” says Sathya Chey, co-founder and managing partner. at Arise Private Wealth.
Even if your employer doesn’t match, consider investing anyway, given the structural benefits of a 401(k), such as tax deferral until withdrawal. Still, some people make the mistake of not contributing at all, Chey says.
“401(k) plans are such an easy, tax-efficient, and generally inexpensive way to invest,” she adds.
2. Over/under analysis
Another 401(k) error can be over-analyzing or under-analyzing your choices in the plan. In terms of over-analyzing, try not to get too caught up in short-term changes.
“Once you’ve decided on an investment allocation that’s right for you, avoid emotional stress and stick to checking your values several times a year, keeping your long-term investment perspective in mind. term,” Chey explains.
On the other hand, you don’t want to adopt a permanent set-and-forget mentality. You should always analyze which investments are suitable for your situation, for example by adjusting your allocations according to your risk tolerance over time.
“As you approach retirement, you should move into a more conservative allocation to limit any large declines immediately before retirement,” Chey says. For those who don’t want to manage this change on their own, consider target date funds if your plan offers them, she adds. “As the specified retirement year approaches, the fund will automatically switch to a more conservative allocation.”
Talk to an expert now who can guide you on ways to grow your money tax-free.
3. Ignore fees and penalties
Participants should also avoid the mistake of ignoring 401(k) fees and penalties. When choosing your investments, you may have several options with varying annual fees. A mutual fund that charges 0.5% per year versus 1%, for example, might not seem like a big difference. But over time, it can build up. Likewise, if you change jobs, you may decide to keep your investments in your former employer’s plan or perhaps transfer the assets to an IRA or Roth IRA. Yet, due to the size of employer-sponsored plans, they can often offer funds with lower fees than you could purchase as an individual. Explore your Roth IRA rollover options here.
This difference can have a significant impact on the total savings. Not only do fees directly reduce your balance, but having less in your wallet affects compound growth potential.
That doesn’t mean you should never roll over your assets or choose certain higher-fee funds, but pay attention to fees in any retirement planning context. Also watch out for penalties, like taking money out of your 401(k) early. Unless you meet certain conditions, such as facing eligibility difficulties, withdrawing money from the plan before you turn 65 may result in additional charges. 10% income tax on funds. Additionally, withdrawing the money, as well as paying penalties, reduces your ability to accumulate savings over time.
How to Fix 401(k) Errors
If you’ve made any of the above mistakes, don’t worry. In many cases, you can make changes to get back on track.
“There are generally no time restrictions on when you can make changes to your deferral amount or your investment options,” Chey says.
So if you want to start taking advantage of the company’s match by increasing your contribution, or perhaps switching to lower-fee funds, you can often do so quickly. Your plan may also offer resources to help you.
“If you’ve made some of these mistakes and need help determining the best course of action, call the plan’s team of financial advisors or help desk,” Chey says.
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