The biggest mistakes you can make with your 401(k)

The biggest mistakes you can make with your 401(k)

With the looming deficits to Social Security, 401(k) plans play an important role in saving for your retirement. To help ensure that you have the retirement you want rather than the one you have to settle for, try to avoid these common mistakes.

1.  Not participating to get a company match

Check your workplace benefits to see if there is a company match offered if you contribute to your 401(k). Many organizations match your contribution up to a certain amount. Make sure you are not losing out on free contributions!

2.  Assuming your minimum deferral needed to get a company match is enough

Contributing enough to get a company match is a great start, but don’t assume that contributing at that level will give you what you need for retirement. Depending on your age and when you started to save, you may need to contribute more than the 1-3% needed to get a company match. A suggested way to start is to increase 1% each year. Or, talk to a financial professional to determine a suggested amount to contribute based on your age.

3.  Only considering pre-tax savings

While pre-tax may be the default option when you enroll, it may not be to your advantage to have all of your retirement savings be fully taxable in the future. Talk to your financial professional about the importance of tax diversification in retirement, and then weigh how much of your 401(k) savings should be in pre-tax, after tax, or Roth (depending on what options your employer's plan offers). You may also be advised to consider other planning tools, like permanent life insurance to improve your tax diversification and retirement income strategy.

4.  Using your 401(k) as an emergency savings account

It may be tempting to draw on your 401(k) account if you need some emergency cash. However, be aware that, if you are under age 59½, when you take a withdrawal from your 401(k) account, you’ll likely pay income tax on the amount withdrawn and a 10% federal tax penalty (unless an exception applies). You will also miss the opportunity to earn compound growth on your account. If it is really needed, there may be ways to take a loan or a hardship withdrawal. Check the plan document for your 401(k) plan to see what provisions are available and the potential cost to you.

5.   Forgetting about your 401(k) after you leave the company 

Each company’s 401(k) plan is a little different – offering different investment choices at different fees. If your company’s investment choices are good and fees are low, consider keeping the 401(k) with that company. However, if your choices are limited and fees are high, look into consolidating them into one account that offers a broad array of investment options as well as reasonable fees. You may be able to roll them over into a 401(k) that you already own or roll them into a new individual retirement account (IRA).

6.  Not taking advantage of the catch up contribution if you are over age 50

If you are over age 50, your 401(k) plan may allow you to contribute an additional amount to your retirement plan, in addition to the annual contribution limit. Take advantage of this opportunity to save extra money for retirement or to catch up if you were delayed in saving to a 401(k) account.

Avoid mistakes

Talk to your financial professional to help avoid these common 401(k) pitfalls and get information you need to get your 401(k) plan on the right track.

The information provided here is for informative purposes only and is not intended to provide legal or tax advice. Should such advice be sought, a licensed professional should be consulted.

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