Finances – 401K Planning
For folks who have the ambition and the financial wherewithal to truly make the most of their 401(k), one of the best ways to begin is by working backwards.
Make the Match
Fully exploiting employer matching is one of the most vital strategies in getting the most out of a 401(k) plan. Matching is pretty much exactly what it sounds like – subject to certain rules and limits, your employer will contribute the same amount of money you contribute, effectively doubling your retirement savings without decreasing your salary or increasing your tax burden.
Watch the Costs
As part of some employee retirement plans, workers can avail themselves of investment advice from independent professionals. Unfortunately, this advice is rarely free and you may find that you pay 1 to 2% of your funds to get this help.
Many workers feel overwhelmed when it comes to calculating their contributions, and then investing that money. Even still, paying for investment advice is a dicey proposition, particularly when it involves a 401(k) plan and investors are given a relatively fixed menu of investment options.
For workers who save some funds in a 401(k) but find that they cannot contribute more, because they are saddled with expensive debt, there may be a counter-intuitive option. Most plans have provisions that allow employees to borrow funds from their own account.
This money comes relatively free of strings. It is possible to use it to repay much more expensive debt, like credit card debt. This money does not come free, but the good news is that the interest charged is basically being paid to you.
Consider Other Options
What do you do if you have maxed out your 401(k) or you really hate the investment options offered? In most cases, you are allowed to have an IRA and 401(k) and contribute to both in the same year. The IRA contributions will most likely not be deductible, but the money put aside this way can still accumulate tax-free over decades.
Once you have contributed as much as possible to these tax-sheltered accounts, there are still other ways to save for retirement. People who are lucky to have maxed out their 401(k) or IRAs in a year can consider buying and investing in annuities.
Last, and by no means least, complaining about a deficient plan can be an effective means of improving your options (and those of your co-workers). If you do not like how a plan is organized or the investment options on offer, say so.
Keep in mind that many employers choose 401(k) plans on the basis of what is cheapest and most convenient to offer, and they may not even be aware of its deficiencies.
While it is true that many workers do not like to be a squeaky wheel, and some companies are certainly apt to be more responsive than others, doing nothing is a pretty good way to ensure that the plan will get no better.
The Bottom Line
Tax-advantaged retirement savings plans are one of the relatively few boons that the government gives to ordinary workers. Careful savings is not likely to be the gateway to becoming a millionaire or independently wealthy, but it can at least go a long way towards ensuring a more comfortable and desirable retirement.
Whatever the specifics on offer to you, be it a 401(k), a 403(b), an IRA and so on, make sure to contribute as much as you can afford and take full advantage of your opportunity to save money for the future.
This article is for information, illustrative and entertainment purposes only and does not purport to show actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular investment action.