At this point, you already know that the 401(k) accounts are not your only option when it comes tosave for retirement. However, if your employer offers one, it doesn’t hurt to take advantage of it, right? However, it’s important to know the tactics experts recommend for maximizing your 401(k) plan balance.
Remember that, The more money you have in your investment account, the greater your chances of enjoying your retirement years..
- 1 How does the 401k plan work?
- 2 How to maximize your 401(k) plan?
How does the 401k plan work?
One of the benefits of the 401(k) is that your money will grow tax free and that those contributions you make can be subtracted when filing your income tax. The bad? When you make your withdrawals -even qualified ones- you will have to pay that income tax.
How to maximize your 401(k) plan?
If this is the question that keeps you up at night, don’t despair! We’ll give you five tips that could take your retirement account balance to the max (within your means).
#1 Make good contributions to be able to claim compensation from your employer
Most employers that offer a 401(k) plan tend to match employee contributions, typically to varying degrees. If you don’t take advantage of this, you would practically be giving up free money. Instead of opting for this -which would be a bad decision- find out how much money you need to allocate from your own income to the 401 (k) account so that your employer puts the maximum possible.
For example, if your employer matches up to 5% of your salary dollar-for-dollar and you make about $60,000 a year, that would mean you would need to put $3,000 of your own money into the account in order to receive another $3,000 more from your employer, which would be the maximum. permitted.
Remember: Those matching contributions will accumulate over time. Let’s say you get an extra $3,000 in your 401(k) account each year. Over 30 years—and as long as the investments you have in that plan guarantee you a 7% annual return on average—just the dollars your employer matched will turn into $283,000.
#2 Catch up on your contributions while you can
Currently, your limit is $19,500, that is if you are under 50 years of age. But what if you are over 50 years old? Then, you can add an additional $6,500 to your 401(k). Doing so will bring your total annual contribution to $26,000. Not bad, right?
Note: With an IRA account, the additional limit is only $1,000 for those who have already reached the age limit of 50 years.
So if you can make contributions to bring your 401(k) up to date, do so without hesitation! Thus, you will be taking advantage of a solid opportunity to have a quite significant amount of money for the future, something that would be maximized even more if this is your oldest account.
In fact, think putting that extra $6,500 a year for 20 years they will give you an additional $26,000this in case the average return on investment is 7%.
#3 Avoid all fees that reduce the return on your investment
The money you put into your 401(k) account shouldn’t stay there—in cash. Ideally, it should become a larger sum. How? With the investment. That yes: be careful of the investments that you choose. Typically, the plan administrator will give you the option to load some of your money into a mutual fund, which is subject to slightly higher fees than index funds.
In this case, We recommend that you opt for index funds that the only thing they do is try to match the performance of the indices that are still in the market. Why? Because they have a strong return, one that is, in fact, better than other mutual funds. Also, since their rates are lower, it might make more sense to go with this option.
Note: If you want to know more about index funds and relative return, which is the measure they use to determine earnings, be sure to see our article “What is the difference between absolute return and relative return?”
#4 Don’t always play it safe
Investing with your 401(k) very conservatively is not recommended. In fact, we could say that the only thing it will do is slow down its growth. Keep in mind that the average annual return we’ve used in our examples—that 7% one—is based on a mix of stock and more moderate investments.
If you are very young, perhaps you should find a way to diversify the portfolio and add a little risk to the equation. When you’re 10 years away from retirement, find a way to move these slightly riskier investments to a safer place.like Treasury bonds, for example.
Note: Please note that when you first sign up for a 401(k) account, your contributions may be invested in predetermined funds with target dates. These funds take a lot of the guesswork out of long-term investing, but they can also be quite conservative. Our recommendation? Explore very well all the options that the administrator of your plan gives you.
#5 Also opt for a Roth account
Recent years have seen more and more 401(k) accounts offer a Roth savings option. With a roth account you have the advantage that you will not have to pay taxes when making withdrawals. The bad? You won’t get that tax break you do with a 401(k).
But nevertheless, There’s no denying that the opportunity to take tax-free distributions at retirement is attractive.. In fact, you could say that having a Roth is a great way to make your retirement process easier and more affordable. It would not hurt to take a look at this option to enjoy some wonderful years of retirement.
Note: If you want to know other information that will help you differentiate the different retirement accounts, be sure to see this IRS publication.
Remember: The decisions you make with your 401(k) could set the stage for the retirement of your dreams. Therefore, it is in your best interest to do everything you can to maximize your retirement plan. Without a doubt, your pocket will thank you when the time comes.