Don’t neglect your 401k retirement plan. They’re like dogs. They love attention and the relationship can be very rewarding for the owner. Take these steps to make sure you’re not missing out. Get a head start and hit the ground running and don’t neglect your 401k.
Don’t Neglect Your 401k Retirement Plan
Companies often make matching contributions to employee 401k accounts. There are various methods and amounts that companies will match. If you’re unsure if and/or how much your company will contribute, call your HR department or retirement plan administrator. Make it easy and ask this simple question, “What percentage of my pay do I need to contribute to receive 100% of the company matching contribution?” They might say 3%, 4% or 5% but whatever the percentage, contribute at least that amount. If you don’t, you’re leaving money on the table.
Consider what you miss out on when you don’t take advantage of matching. Below are two scenarios where the employer provides matching based on what you contribute up to a maximum of 4% of compensation. In isolation, they don’t appear that significant. However, over time, the numbers add up to a lot!
Employer matches $0.50 on every dollar you put in up to 4% of compensation. Your salary is projected to increase by 3% each year. You would have contributed $34,392 and received over $17,000 from your employer. See the chart below:
Employer matches $1.00 on every dollar you put in up to 4% of compensation. Your salary is projected to increase by 3% each year. You would have contributed $34,392 and received over $34,392 from your employer. See the chart below:
If you don’t know what portion of your 401k is yours if you left tomorrow, find out! Vesting schedules are important because like employer matching there are various types. The vesting schedule will show you how much of the employer contribution you’re entitled to keep based on years of service. Not being aware of this can cost you thousands of dollars and hurt your retirement next egg. If you’re planning a job change, make sure you know exactly what you’ll lose.
Keep an eye out for notices the employer provides. Some employers opt for a Safe Harbor form of matching. This simply means they are following an approved formula to provide matching contributions which give them relief from more complicated and burdensome testing rules. If you receive safe harbor matching contributions from your employer, you are 100% vested in those dollars. Stated another way, you don’t have to wait a period of years before you could access 100% of the funds.
Find out if your company retirement plan has Roth provisions. This add on to a 401k retirement plan allows employees to make salary deferral contributions that are after-tax (as opposed to typical pre-tax). You won’t receive a reduction in your taxable income now, but you’ll be able to make withdrawals tax free during retirement. Your employer matching will still be pre-tax, but you’ll now have a “tax free” bucket to to tap into during retirement. Predicting future tax rates involves crystal balls so rather than trying to guess, look at this as tax diversification. This can be especially attractive for younger workers who are just starting out an may be in a lower tax bracket.
Why is this important? Everything you put into a traditional 401k will eventually be taxed. That may not seem like a big deal now, but it will be in the future. There is a big difference between tax-deferred vs. tax-free and many people don’t appreciate the difference until it’s too late. If you’re in a lower tax bracket now, the benefit of reducing your taxable income is less than if you’re in a higher tax bracket. The opposite is true if you’re currently in a high tax bracket.
A big part of managing your 401k is making sure your investments are in line with your risk tolerance, investment objective, and time horizon. If you built a moderate portfolio two years ago, it is likely that your riskier investments (stock funds) have risen in value. Because of this, your 401k may be out of balance and you may be taking on too much risk. This will also help you stay focused and avoid making snap decisions based on what is currently going on in the market. The same can be said when markets are on a decline. Re-balancing your portfolio isn’t just for bull markets.
There is always room for improvement so don’t neglect your 401k. Take some time to look into these aspects of your retirement plan. You don’t need to be an expert to tackle these items. You can make these adjustments a little at a time.
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