We get a lot of questions about 401ks as one of the leading financial advisors in Grand Rapids. To help clear up some of the confusion around your 401k, we offer our 9 Tips to Improve your Current 401k Investments
When a company offers a match, it offers potential for “free money” which is not available through any other avenue. If you are a married couple, look at both individuals’ retirement plans to make sure the match is being utilized. Don’t look only at your own 401k plan and ignore your spouse’s plan.
Look carefully at what your employer offers in the 401k plan. Today many employers’ retirement plans include a “Roth 401k” and “traditional 401k” option. At first glance, a Roth 401k is funded with after-tax money (no impact on income) may seem like a great option; however, Roth 401k is best used when the individual expects the tax rate to be higher in retirement versus the current tax level. For most individuals, this is not the case. Most expect tax rates to be lower in retirement as they are unable to generate the same income level in retirement. For most workers in the prime of their career, the traditional 401k is best because it allows the individual to lower their taxable income at the height of their income & tax level.
If using the target date fund, understand the fund may be very aggressive for younger workers. The fund is designed to be the only fund in your retirement plan. Note the target fund depends on the individual best lining up the retirement date with the corresponding fund… not a wishful thinking target fund 10 years later or earlier than expected.
For a variety of reasons, each employer has a different level of costs, investment options, matching, etc. Frequently, smaller employers may have significantly higher expenses in their retirement plan due to limited scale benefits. Thus, couples that cannot max both plans should determine which plan is best after all matches have been utilized.
One of the great benefits of 401k is the ability to lower your income during your prime working years. If under 50 years old the maximum is $18.5 k/year, the maximum for those over 50 years old is $24k/year. The maximum applies to each spouse based on having an equivalent income level.
While some plans may have great options and/or discounted expenses, the biggest risk is forgetting about an old 401k or simply not tracking the performance. Old retirement plans may mount since the average employment does not last very long for young workers. The IRA Rollover may have monthly or yearly fees just for having a retirement account; thus, consolidating old accounts may limit the fees for simply having an account (not actually increasing assets).
Many employers allow a self-directed investment option which will allow you access to many more investment options than your plan offers. While this is recommended for more knowledgeable investors, the option may allow you access to the exact investment option you prefer.
In addition to income taxes on the distribution, your assets may be subject to 10% early withdrawal penalty if taken prior to 59 ½. Exceptions may apply to avoid this penalty if you retired before 55, total and permanent disability, etc.
Most employers do not manage your 401k account. Thus, ensure you understand what your current investment approach is. Detrimental performance is not the responsibility of the employer.