How to Make the Most of Your 401k
The IRS, through tax code 401k, gives qualifying employees immediate income tax reduction and upside market potential for saving, so take advantage!
9 Steps to Make the Most of Your 401k
1. Determine how much of your gross income you can save, up to current limits set by the IRS.
2. Talk to a benefits counselor of your company to get information about how to set up your 401k account.
3. Study the various savings and investment options (usually mutual funds) available to you and determine how you want your regular contribution distributed to those options.
4. Consider talking to a representative or investment advisors that may visit your worksite for details about particular investments.
5. Find out how “portable” your account is, that is, how much of it you can take with you if you leave and when you will be “vested”.
6. Read carefully all prospectuses and know how much you will be paying for mutual fund management of your money.
7. Go to the library and ask the reference librarian to direct you to current sources of information about your investment choices, or search the internet.
8. When you feel comfortable with your decision, sign the necessary paperwork to have your 401k contribution automatically deducted from your regular paycheck.
9. Carefully review your 401k statements, which usually come to you on a quarterly basis, and make sure you are comfortable with your investment choices and their performance.
Tips and Warnings
- If you can afford it, maximize your 401k contributions because they immediately reduce the amount of money the IRS will tax, and all of your gains grow tax-deferred.
- With most plans, you can borrow money for emergencies or special circumstances from your 401k account.
- Most companies will allow you to purchase company stock within your account.
- If your company provides “matching” – putting into your account what you put in – contribute at least what your company will match (usually a percentage of your gross income, for instance, 3%).
- Remember that this money is for your retirement, so long-term investment strategies are appropriate.
- When you approach retirement years, begin to study ways of managing your 401k account when you leave and make sure that you know all of your options and their tax consequences, if any.
- Mutual funds are securities and are market-sensitive; the value of your account may fall in value.
- Watch your funds’ performance, but don’t panic if you see a precipitous drop in value, especially in the more aggressively-invested funds; remember, when the value of the fund drops, so do “share prices,” so, in a way, you bought them “on sale.”
- Don’t just “set and forget” your fund allocation; stay current, and if there has been a change of fund managers, or a significant change in how the money in the fund is invested, further research is called for.
- If you plan to leave the employer that provides your 401k plan, find out well in advance exactly what options you have in moving your money to another employer’s plan, or rolling it into an a personal IRA account.
- Be careful if you buy company stock in your 401k; if you have a high percentage of your money in company stock and the company fails, you could see virtually all of your retirement savings disappear (drop to zero in value).
- Don’t borrow from this account unless it is absolutely necessary.
- Cashing out part or all of your 401k account before 59 1/2 years old will trigger a tax-event and penalties in the year that you take the money.