You may think that your employer and the IRS are two of the last places from which you would receive a free and incredibly valuable gift. Think again!
Your 401k plan is a powerful benefit that allows you to take control of your retirement destiny. Avoiding these three mistakes will increase the probability you will be able to live a worry-free retirement.
Strike One: Not participating:
Most of today’s workers will not benefit from a lucrative defined benefit pension plan. To what degree social security will be available to you upon your retirement is debatable and uncertain. Providing for your retirement is no longer your employer’s or the government’s responsibility. It’s yours!
Don’t let the, “I am too young” thoughts settle in your mind. Your 401k plan offers you powerful tax benefits and the longer you wait to participate the farther behind the retirement eight ball you become. Learn from those who are nearing retirement: just ask a few fifty year olds if they wished they would have started to save for retirement earlier.
Any contributions you make will reduce your taxable income for the year and will grow tax-deferred until retirement. Many employers will also match a portion of your 401k deferrals. This is free money, take it when you can because it doesn’t come around that often.
The sooner you start participating in your 401k, the better. You won’t have to save nearly as much of your salary to reach your retirement goals if you start in your twenties or early thirties, than if you start in your mid forties or fifties. All isn’t lost if you get started late, however, it just means you will have to aggressively save those final working years and you many not be able to take quite as many exotic vacations upon retiring.
Strike Two: Not contributing enough:
Most financial planners will tell you to do just about anything in terms of juggling cash flow and expenditures so that you are at least contributing enough to your 401k to maximize your employer’s matching funds. Not all employers offer matching 401k contributions, so you should latch on to this benefit and take full advantage of it when you are lucky enough to have this opportunity. Your employer’s matching contribution is in essence a 100% guaranteed investment return. Where else can you get that return on your money? I’ll answer that for you, nowhere!
Contributing early and often to your 401k will not only allow you to reap the inherent tax benefits and the company matching funds, but it will also increase the probability of meeting your long-term goals by aiding in the compounding effect. The power of compound growth is difficult to comprehend. Consider the illustration of the 18 year old that saved $4,000 a year until he was age 55 and earned 10% on his money along the way. He would end up with over $1.3 million at age 55.
Don’t let the temptation of spending now and saving later take hold. It will have devastating long-term effects. Save as much as you can as early as you can.
Strike Three: Cashing-out:
When you switch jobs or retire, you have a decision to make regarding how you will handle the retirement savings you have accumulated in your 401k account. Cashing-out of your former employer’s 401k is rarely the best option. The amount of your distribution will be reported to you as taxable income, and if you are under the age of 591/2, you may also be subject to additional penalties.
The advantage of taking a lump sum distribution or cashing out of your former employer’s 401k is that you have immediate access to your funds. This access comes at the steep cost, though, of triggering a taxable event and possible penalty situation, as well as giving up the powers of long-term tax advantaged compound growth.
For these reasons, utilizing a 401k rollover is oftentimes the best decision and helps to position you for a retirement that is both rewarding and relaxing.
The views in this article do not necessarily reflect those of the Debt Consolidation Loan Directory.
This article is for educational purposes only and is not a personal recommendation of any strategy or product. You should not make any changes to your financial situation based only on this article. It is advised that you consult a qualified advisor and tax professional to evaluate your situation before making any changes to your finances.