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4 Things You Should Never Do With Your 401(k)

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A 401k plan is a great way to save for retirement, but some abuse it. Here are 4 things you should never do with your 401k as it can cost you money.

If you are working for a company that offers a 401k with benefits (like a 100% match), you should absolutely be taking advantage of it. A 401(k) is your ticket to retirement, and unfortunately, not enough people in the workforce are punching their ticket.

There are a lot of misconceptions surrounding 401(k)s. Many people don’t realize how the plans work; how their match works or even what happens if they leave their job or take money out. They are uninformed about fees, funds and the rules associated with their retirement accounts.

Because of this, I’ve listed some important tips about what you should never, ever do when it comes to your 401(k).

#1 – don’t know the Percentage You’re Contributing

 

It’s becoming common for companies to automatically enroll their employees in a 401(k) plan. This idea started because many people weren’t contributing to retirement accounts at all, and an automatic enrollment plan helps to increase participation.

While automatic enrollment isn’t a bad thing, it does have some downsides, according to an article at CNBC. For example, many employers will enroll you at a low contribution rate, one that might not allow you to comfortably save for retirement.

So, forgetting to increase your contributions could mean working longer or never being able to retire at all. Additionally, some people don’t want to be enrolled or don’t even realize they’ve been enrolled, so transparency can be hard to come by depending on where you work.

Obviously, we’re big fans of saving for retirement and advocate for it. Still, even if you’re actively saving, be sure to check and double check the percentage you’re contributing to your 401(k) from your paycheck. An ideal percentage to save is around 10%-15% of your paycheck.

#2 – Borrow $$$ From Your 401(k)

 

I know this goes without saying, but it’s worth putting out there in case you’re considering it. Many people borrow money from their 401(k)s and the reasons vary, from paying off debt to building an addition on a home.

Remember, though, that your 401(k) investments are there to help you save money, not spend it. If you borrow from your 401(k), there are many downsides when it comes to how the loan works. We’ve talked here before about why it’s a bad idea to borrow money from your 401(k) but basically, it boils down to delaying immediate gratification for long-term satisfaction.

#3 – Neglect to Roll It

 

Not everyone is able to stay at one job forever, and that’s okay. However, if you neglect to move your old 401(k) into a new account, you could be paying stealth fees that you aren’t aware of. Sometimes old employers will allow you to leave your 401(k) with them.

Sometimes, especially if the account is small, they’ll force you to take it with you. When that happens, you can either roll the money into another 401(k) with a new employer, or you can do what many people choose to do and roll your old plan into a new Rollover IRA. Thankfully, there are a number of online brokerages that make it easy for you to roll over your 401(k) into a Rollover IRA; Betterment, Wealthfront and Vanguard are all great options.

Just make sure to talk with the brokerage first to ensure it offers the tools you want and need and that the rollover is handled properly from a tax perspective before you move your money. If you need some help deciding which brokerage is right for you, check out our best online brokerages page for available options.

A 401k plan is a great way to save for retirement, but some abuse it. Here are 4 things you should never do with your 401k as it can cost you money.

#4 – Be ignorant about your Asset Allocation

 

One of the biggest mistakes you can make with your 401(k) is to invest all of your money into one company or option. It’s okay to be safe (or even take a few risks), but you also want your 401(k) to be diversified. That means not pouring your whole retirement account into your company’s stock and not buying only stocks.

What’s important is to do some research on the best asset allocation for your age and risk level. Typically, the younger you are, the more aggressive you can be. If all of this sounds like mumbo jumbo, just remember that learning about investing is actually a lot easier than it sounds. If you’re new to investing, here’s a guide on how to start investing in the stock market that makes it simple to get started.

Ultimately, when it comes to your 401(k), the most important thing is to be educated and informed. As the saying goes, no one cares about your money more than you do, so if you’re not checking to see what percentage your company takes or looking into how your investments are doing, you could be leaving a lot of money on the table.

 

Are there any other tips I left off of this list of things you shouldn’t do with your 401(k)? How many old 401(k) plans do you have sitting with former employers? How much of a match does your employer provide?

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Catherine Alford is the go to personal finance expert for parents who want to better their finances and take on a more active financial role in their families. Check out her award winning blog, CatherineAlford.com.

5 Comments

  • Kathy says:

    Borrowing from a 401K should be illegal. You can’t borrow from Social Security so why should you be able to borrow from any other retirement account? That fund is for retirement, not for a house downpayment, vacations or home improvements That is what personal saving accounts are for. It makes no sense.

    • John Schmoll says:

      Completely agreed Kathy. In my old day job I spoke with countless people who viewed their 401(k) as a piggy bank. I *might* get it if you have absolutely nothing else, but that’s rarely the case. Vacations, home improvements, etc. are what savings are for.

  • Syed says:

    All excellent points. I’ve talked to many high income earners who contribute nothing to their 401k. It boggles my mind. You can save a huge amount off of your tax bill each year while allowing your investments to grow tax free for decades.

    There’s a lot of disinterest and apathy out there when it comes to financial products. I Guess that’s why we write what we do!

  • More people need to read this. Many people I talk to including my coworkers and family don’t know what their contribution rate is. I just recently upped mine so I’m putting more towards my retirement.

    I also know a few people who recently took money from their retirement accounts to fund their down payment. I couldn’t believe it. That doesn’t make any sense to me, but I’m finding that it’s more common than I realized.

  • Great things to think about, Cat. The nice thing is a lot of your 401k can just fall under “set it and forget it” where you don’t have to constantly be tweaking it and paying attention to it. A great “over time” tool to build wealth.

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