Opening a 401(k) retirement account through your employer may help you reach your retirement savings goal. These popular plans may provide tax advantages and more.
Although a 401(k) may be one of the best ways to invest in your future, you need to know how to manage a 401(k). Here are 7 smart 401(k) tips:
1. Join it
First the obvious: you can’t benefit if you don’t participate. Not joining means you miss out on pretax savings and tax-deferred investing. You may also miss out on matching contributions from your employer and access to professional money management. So sign up and start your 401(k) plan as soon as possible.
2. Take the match
Would you willingly pass up free money and potential growth from that money? Many employers offer to match your 401(k) contributions up to certain percentage. While your own contributions come from your paycheck, the company match is added by your employer. Try to at least kick in what they’ll match. If they’re offering, why turn down extra money?
3. Have a real plan
Even if you already contribute to a 401(k), just winging it might not yield the best results. Meet with an investment professional to look at your financial situation, discuss your retirement goals and develop a plan for managing your 401(k). Don’t risk outliving your retirement assets or not having enough money to support your current lifestyle after you retire.
4. Be well-rounded
Be sure your portfolio reflects your risk tolerance and goals with an appropriate blend of stocks, bonds and cash. Work with an investment professional to craft the best asset allocation strategy for your needs. Remember, asset allocation and diversification don’t assure a profit or protect against loss, but they’re generally a smart practice.
5. Look at long term
Your best defense against market ups and downs is to follow a well-honed strategy rather than chasing the latest hot investment sector. Review your portfolio each year to make sure it matches your long-term investment objectives, and to determine if you need any adjustments. Remember, investing for retirement is a marathon – not a sprint.
6. Let it grow
Taking a loan from your 401(k) for an emergency is understandable, but it could reduce the amount of money you’ll have at retirement. If you don’t repay the loans, you may also incur penalties and taxes. While the loan money is out of your account, it isn’t bringing market returns. If you must borrow from your 401(k), keep contributing as you repay it.
7. Hands off until you retire
Cashing in your 401(k) before retirement means the money loses its tax-deferred status and becomes subject to income taxes. There could also be an early withdrawal penalty – all of which means less money for your retirement. If you change jobs, you don’t have to cash out your 401(k). You actually have other options:
- Roll your 401(k) assets over into your new employer’s plan.
- Keep your old account and start a new 401(k) account with your new employer.
- Roll your old 401(k) into an IRA and open a new 401(k) account with your new employer.
A couple other things
Keep in mind that all investing involves market risk, including the possible loss of principal. There’s no guarantee that your investment goals will actually be met.
Withdrawals from a 401(k) may be taxed as ordinary income, and subject to a 10% penalty if you take them before you’re 59½ years old.