4 Things You Should Never Do With Your 401(k)
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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 and Vanguard are both 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.
#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 don’t know what investments to select, or think you could do better with what you’ve selected, Blooom is a great resource to help better manage your 401(k) investments.
Blooom is a service that will analyze your plan to see if you’re overlooking lower cost or better performing funds within the plan.
Blooom will give you a free analysis of the investments in your plan to lower fees so more of your money will work for you. Blooom does charge $10 per month, but offers a 30-day free trial to help get your 401(k) plan in shape.
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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