Getting The Most Out Of Your 401(k)
by Joe Chapin
401k Plans Explained
Retirement and Your 401k
Making the Most of Your 401k
Contribute as much as possible to your account. Even if you can't contribute the maximum amount, put in enough so that you receive the full benefit of your employer's matching contribution. If your employer provides a 25% match on all of your contributions up to 5% of your salary, you should contribute at least 5% of your pay. By doing this, you guarantee yourself a 25% return on your investment right from the start and that doesn't even take into account the tax savings or the return on your investment. Where else can you guarantee yourself a return like that??
Be careful not to load up excessively on your own company stock. Do your research on your company just as you would for any other investment. Years ago at a steel company that I once worked for, many employees piled their 401(k) savings into company stock as it soared from its IPO price of $17/share to well over $50/share. As the employees bought share after share at inflated prices, the stock started to level off. It wasn't long after that, that share prices fell to the $10/12 range. It will take these employees years, if not decades to make back the money that they would still have if they would have diversified their holdings somewhat. I am sure that some of those very same employees are holding that stock, hoping to just break even. As late as last week, the stock was just under $4/share. I am not saying that you shouldn't buy any of your company stock, just don't overdo it.
Hopefully you will be fortunate enough to have a varied selection of funds in your plan. This will allow you to get some exposure in areas that you have little or no experience with. For example, if the majority of your stock holdings are in large cap companies, it would make no sense to put additional capital into a large cap fund. You should consider putting this money into an international fund or a small cap fund. If you are just starting out and have no real experience, an index fund is definitely the place to be. Either way, check to see how the available funds have performed compared to other funds in their category over the past 4 to 5 years. Morningstar is an excellent source of mutual fund information and is available in most libraries. A good fund will be in the upper half of their sector, preferably in the top third. One more note, as you get older, you may want to invest in some bond funds……..but not me.
As tempting as it may be, do not borrow money from your 401(k) account. Sure, you are paying yourself back, but you are paying yourself back with money that has already been taxed. At retirement you will have to pay taxes on that very same money…again!! Additionally, if you were to lose your job, you would have to pay back what you owe at a time that you probably couldn't afford to. If you really need the money, check into a home equity loan.
If and when you make a job change you will need to make some decisions. What should you do with the savings that you have accumulated in your former employer's plan? Should you leave it there? Roll it over into your new employer's plan? Take a cash distribution? Roll it over into an IRA? Whatever you do, do NOT take a cash distribution. In addition to losing the tax free growth of the money that you have accumulated, you will pay a mandatory 20% federal withholding tax AND an additional 10% if you are under 59 ½ years of age, not to mention state and local taxes. Leaving your money where it is an option, but I believe that you are better off with the other options mentioned. By transferring your holdings to your new employer's plan it becomes easier to keep tabs on your holdings. In my opinion, the wisest choice that you can make is to roll your 401(k) over into an IRA. An IRA gives you virtually an unlimited number of investment options. In your 401(k) you were limited to a select group on investment options. If you roll it over into an IRA you can invest in anything except real estate, gold, jewelry or collectibles. An IRA also gives you flexibility with your choice of beneficiaries. The only real drawback is your inability to borrow funds from your IRA, however, that would be a bad idea even if you could.Make the most of your retirement dollars and your road to retirement could be shortened significantly. Find yourself an investment mix that you are comfortable with and sit back and watch it grow. See you on the golf course.
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