If you do not use your account correctly, you may not be able to save enough money or you may incur extra fees and penalties. Getty Pictures
Having sufficient funds for retirement frequently requires decades of planning, saving, and investing. 401(k) plans facilitate retirement planning for the majority of Americans.
These vehicles let workers to transfer a portion of their paychecks into tax-advantaged investment accounts that they can access in retirement. According to the Investment Company Institute, around sixty million Americans actively participate (ICI).
Individuals must manage their 401(k)s in a manner that positions them for retirement success, despite the fact that companies are responsible for setting up the plans and providing perks such as company matching. If you do not use your account correctly, you may not be able to save enough money or you may incur extra fees and penalties.
Consider the advantages of a Roth IRA if you’re evaluating your retirement options or considering a rollover of an existing 401(k).
However, present 401(k) members should avoid the following three typical mistakes:
1. losing the game
You may believe that you do not have enough money to put in your 401(k), but you should think again before declining company matching. A match indicates that your company will contribute the same amount to your 401(k) as you do, depending on a maximum percentage of your salary.
“Many 401(k)s offer an employer match of at least 3% of pay, so if you do not defer at least this amount, you are essentially rejecting free money,” explains Sathya Chey, co-founder and managing partner at Arise Private Wealth.
Even if your employer does not make a matching contribution, you should still consider participating due to the structural benefits of a 401(k), such as tax deferral until withdrawal. Chey notes that some individuals make the error of not contributing at all.
“401(k) plans are such a simple, tax-advantaged, and often low-cost method of investing,” she continues.
2. Over/under-analyzing
Another common 401(k) mistake is over- or under-analyzing your plan options. Regarding overanalysis, try not to become too preoccupied with short-term changes.
Chey advises, “Once you’ve settled on a suitable investment allocation, avoid emotional stress and stick to monitoring your values a few times a year while keeping your long-term investing viewpoint in mind.”
On the other hand, you should not adopt a constant “set it and forget it” attitude. You must still examine whether investments make sense for your circumstances, such as modifying your allocations over time to match your risk tolerance.
Chey advises, “As you approach retirement, you should shift toward a more conservative allocation in order to minimize large losses right prior to retirement.”
Consider target-date funds if your plan offers them, she says, if you don’t want to manage this transition on your own. As the designated retirement year approaches, the fund’s allocation will automatically become more conservative.
Consult an expert immediately for advice on how to build your money tax-free.
3. Ignoring charges and fines
In addition, participants should avoid the error of disregarding 401(k) costs and penalties. You may have access to a variety of investing options with various annual fees. For example, a mutual fund that charges 0.5% per year versus 1% per year may not seem like a significant difference. However, that might build up over time.
Similarly, if you switch employment, you may decide whether to retain your investments in your prior employer’s plan or roll them into an IRA or Roth IRA. Nevertheless, due to the size of employer-sponsored plans, they can frequently provide funds with cheaper fees than those available to individuals. Explore your rollover choices for your Roth IRA here.
This variation can have a significant effect on total savings. Not only do fees immediately reduce your portfolio’s value, but a smaller balance also limits the possibility for compound growth.
This does not imply that you should never roll over assets or choose higher-fee funds, but you should be aware of costs in all retirement planning contexts.
Also beware of penalties, such as early withdrawal fees from your 401(k) (k). Unless certain conditions are met, such as a qualifying hardship, withdrawing funds from a retirement plan before age 65 may result in an additional 10% income tax on the proceeds. In addition, withdrawing funds and incurring fines diminishes your capacity to compound savings over time.
How to rectify 401(k) errors
Don’t worry if you’ve committed any of the aforementioned errors. Frequently, you may make adjustments to get back on track.
According to Chey, there are normally no time constraints on modifying your deferral amount or investing selections.
Therefore, if you wish to begin taking advantage of business matching by increasing your contribution or move to lower-fee funds, you can typically do so immediately. Your strategy may also include assistance resources.
Chey suggests contacting the plan’s financial advisor team or help desk if you’ve committed some of these errors and need assistance determining the best course of action.