Retirement plans are 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 401(k).
Companies often make matching contributions to employee 401(k) 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.
If you don’t know what portion of your 401(k) 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.
Find out if your company retirement plan has Roth provisions. This add on to a 401(k) 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.
A big part of managing your 401(k) 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 401(k) may be out of balance and you may be taking on too much risk.
There is always room for improvement so don’t neglect your 401(k). Take some time to look into these aspects of your retirement plan and go into 2015 with greater financial confidence.
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