When it comes to retirement savings, the 401(k) account is front and center. To make sure you’re getting the most out of your 401(k), keep these five tips in mind:
1. Contribute to your employer’s match in your 401(k)
For 2013, you’re allowed to contribute up to $17,500 into your 401(k). Many employers tend to match the amount of money you put in – or at least kick in 50% of every dollar you put in. If your employer matches what you put in, then contribute up to the maximum level, because that’s free money. If your employer doesn’t match (and many smaller companies can’t afford to match), contribute however much you can afford, ideally 10-15% of your annual income.
2. Your 401(k) is not an ATM
Act as if the money in your 401(k) plan doesn’t exist. Even during tough times, money in your 401(k) plan should be left untouched. If you withdraw money from the account before age 59.5, you’ll be subject to a 10% penalty fee and you’ll have to pay ordinary income taxes on the withdrawal, because money you contribute to a 401(k) is pre-tax dollars. Plus, should you ever declare bankruptcy, the money in your 401(k) is protected, yet another reason to keep money stowed away in the account.
3. 401(k)s are littered with fees
Employers will hire outside firms to manage their 401(k) plans – and there will be fees involved and employees will have to foot the bill for this. A report from Demos showed that a couple could pay more than $155,000 in 401(k) fees over a lifetime. As of July of last year, any company that manages a 401(k) plan will need to disclose to your employer the breakdown of the fees its charging and your employer needs to pass along this information to employees. You can then decide for yourself if the fees are too much and in that case it may make more sense to divert more of your money into a Roth IRA instead.
4. If you switch jobs, don’t forget about your old 401(k)
When you switch jobs, if your new employer has an attractive 401(k) program, ask if you can simply transfer the money from your old 401(k) to the new 401(k). On the flip side, if you don’t like the new 401(k) plan, contact a discount brokerage firm about rolling over the money into an IRA. This way, you can then pick your own investments and there won’t be all the fees that come along with the 401(k). Don’t just leave the money in your old 401(k) account – some employers may just write you a check if you do that – but again, if you’re under age 59.5, that will be considered early withdrawal and you’ll be subject to the 10% penalty.
5. 401(k) plans aren’t enough – Roth IRAs are also important
Even if you have a 401(k) plan that you like, it’s also wise to open up a Roth IRA from a discount brokerage firm. You can deposit up to $5,500 per year – and this will be money you’ve already paid taxes on. The Roth IRA is very flexible – it lets you withdraw your original contributions (not the growth) at any time without any penalties or fees. You can even make these contributions automatic, which forces you to save for retirement.