Do you use an employer-sponsored 401(k) as your primary retirement savings vehicle? You’re not alone. Since its inception, the 401(k) has quickly become a popular employee benefit, and it has largely replaced the pension as the top employer-sponsored retirement plan.
A 401(k) can be a powerful retirement accumulation vehicle for a few reasons. One is its tax treatment. A 401(k) plan is tax-deferred. That means you don’t pay taxes on the growth as long as the funds stay inside the plan. That tax deferral may help your funds accumulate at a faster rate than they would in a taxable account.
You may also benefit from employer matching contributions. Many employers will match a certain amount of employee contributions. For example, your employer may match a contribution of up to 3 percent of your salary. These contributions can help you boost your savings rate.
While a 401(k) can be a useful tool, it does require some management and attention. If you make poor choices with your plan, you could cost yourself serious assets when it comes time for you to retire. Below are a few mistakes to avoid with your plan:
The 401(k) cash-out is one of the biggest threats to retirement stability. According to a study from Boston Research Technologies, 34 percent of millennials, 34 percent of Gen Xers and 24 percent of baby boomers have cashed out at least one 401(k) plan.1
A cash-out usually happens during a job change. Rather than roll the funds over to an IRA or a new employer plan, many people choose to take the balance as a lump-sum payment. That could be a costly mistake.
When you cash out a 401(k) plan, you have to pay income tax on the entire distribution if the funds aren’t rolled over to an IRA or new employer plan within 60 days. If you are under age 59½, you may also face a 10 percent early withdrawal penalty. That means you could pay a substantial amount simply to take your funds. The withdrawal could cost you future growth and impact your retirement savings balance.
Overuse of Company Stock
Another common error is when employees allocate a large portion of their funds to company stock. Many employers offer company stock as an investment option in the 401(k) plan. As an employee, you might be enthusiastic about the company and its potential for growth. It could be tempting to put your money into the stock.
However, there are risks with this strategy. One is that it’s rarely a wise idea to put a substantial amount of your funds into any one investment or asset class. Diversification helps you mitigate risk. Another challenge is that you could be doubling your risk with the company. You already count on your employer for income. If the company struggles financially and you’re heavily invested in company stock, you could lose your job and much of your retirement savings.
Home Down Payment
Some plans allow you to take an early distribution from your 401(k) without penalty if you’re using the funds as a down payment on a home. This could be a tempting strategy, especially if the extra down payment could help you afford a nicer home.
Consider that by withdrawing the funds, however, you could be forfeiting years of tax-deferred growth on that money. It’s also possible that your home’s value won’t increase substantially. Instead, you might want to look for other ways to make the down payment, or consider a smaller home that wouldn’t force you to tap into your 401(k).
Ready to develop a 401(k) management strategy? Let’s talk about it. Contact us today at MasterPlan Retirement Consultants. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. All information and ideas should be discussed in detail with your individual adviser prior to implementation.
Investment advisory services offered through MasterPlan Retirement Consultants, Inc. a Registered Investment Advisor in the state of Georgia. Insurance products & services offered through Fricks and Associates, Inc. MasterPlan Retirement Consultants, Inc. & Fricks and Associates, Inc are affiliated companies.
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