4 Simple Ways to Make the Most of your 401K
Now that we are more than half way through the year it is a good time to look at where your 401k strategy stands. Here are 4 simple steps you can take to build a strong nest egg.
1. Contribute at least up to the amount of the company match. If you have a company match and you don’t contribute enough to get the maximum amount of that match you are walking away from free money. It is equivalent to turning down a bonus from your boss. If your match would be $600 a year you would have over $50,000 more in your account after 30 years (at 6% return).
2. Invest your money. There are too many people that leave all their 401k money in a money market paying less than 1% interest. Even though inflation is low, it is still over 2%. If you are one of these people, your money is growing at a slower rate than inflation. This means you are losing purchasing power every year. Whether conservatively or aggressively, you need to invest your money in stocks and bonds. If you are in the money market because you are not sure which investments are right for you, contact a financial advisor. They can guide you to the right choice.
3. Don’t Borrow. Once you have accumulated a little money in your 401k, it can be very tempting to borrow that money. At times everyone runs into a little financial distress. Borrowing from your 401k seems like an easy solution. After all, it’s your own money and you are paying interest to yourself. But, don’t do it! I (or should I say When) you leave this job and you have a 401k loan outstanding, it becomes immediately payable in full. If you can’t pay it off, the balance becomes taxable and possibly subject to penalties, long after you’ve spent the money. Worse, you no longer have that money in your 401k to continue to grow. So, don’t do it!
4. Don’t take Distributions. This one is somewhat related to the borrowing issue. When you change jobs you have the opportunity to roll your 401k account into an IRA or another Pension. But you also have the opportunity to take the money as a distribution. When you take the distribution you will pay tax on it, as well as a 10% penalty if you are under 59 ½. Depending on your tax bracket , that could mean that anywhere from 25 to 50% of your money could be going to the government. But even worse, the money you have been saving for a comfortable retirement is gone along with the future earnings you would have added to it.
These are simple ways to approach your 401k, but they can go a long way to building a considerable and comfortable retirement.TC