The year 2020 had over 60 million Americans participating in some form of 401k program. The average employee opted to add up to 9.3 percent of earnings into their plan.
The good news for those investors, the average plan had increases in value of up to 24 percent. Since most people put money into a 401k for their retirement years, this wealth management news was welcome.
If you’re being careful to put money away, you might want to know how to best maximize your 401k so you get the most gain from your investment.
Read on to make sure you’re practicing all these strategies to get the most out of your 401k investment.
1. Take Advantage of a 401K Match
Many companies now offer their employees the option of investing in a 401k plan. Even better, many companies will match funds going into the 401k.
Every company is different, so you want to ask good questions about the options you have with your employer.
Some employers will put money into a 401k on your behalf whether you invest or not. More likely is the scenario where the employer matches the money that you invest.
This is like free money and you shouldn’t ever pass this up. Your employer might say something like we will match whatever you invest into your 401k up to a certain percentage, let’s use7% as an example.
If you only put away four percent into your 401k, you are giving up an additional free three percent from your employer.
One way to maximize the 401k is to put away as much as is allowed and that the employer will match.
2. Invest in a Roth
One strategy for managing your wealth for the future is to diversify the type of accounts you’re opting to invest into.
Many employers are now offering employees the option of investing in a Roth 401k plan. A Roth is different because the money is invested after taxes and distributed later tax-free.
This can maximize your earnings in the long term because many young workers will be taxed at a lower rate when they make less money in their younger working years.
Instead of paying the taxes when you get the money later in life and are perhaps in a higher tax bracket, you pay them early at a lower rate.
3. Don’t Cash Out Early
The working world has changed drastically from a generation or two ago. It used to be that you started to work for one employer and stayed, often for your whole working life.
In today’s working world, it’s estimated the average worker changes careers between three and seven times.
The issue becomes what to do with your invested 401k funds when you leave one company for another. Resist the urge to take the money and spend it.
First, you’ll get taxed on the money at your current taxable rate and pay penalties. Second, you lose all the investing power you put into getting that money put away.
Instead, either leave the investment alone. Or talk to your financial planner about rolling the money into another investment to avoid paying the taxes and penalties.
4. Get Vested
Speaking of moving careers, one thing you want to try to do is to stay at a company long enough to be vested. Most companies won’t allow you to keep the matching funds they’ve put in for you if you’re not vested.
If you’re considering a career move, you want to know what the required number of years is to become vested so you don’t forfeit the matching funds.
5. Rollover, Don’t Cash Out
If you do opt to make a career change, you’ll have to decide as was already mentioned what to do with your 401k investment. The option you always want to select is to roll over those funds.
Talk with your financial planner, especially if you are later in your career years and closer to retirement. Should you opt to leave the money where it is? Should you roll it over into another account?
6. Watch Out for Fees
Not all 401k plans are created equal. In fact, the fees they charge can vary greatly from plan to plan.
You want to research your plan options, consider your risk tolerance based on the plan options, then choose the lowest cost plan from your choices.
Plans with high fees can really eat away at your growth over time. You won’t grow your investment if you’re paying it all out in fees to the plan.
7. Save More Than The Minimum
More and more companies will automatically sign you up for their 401k plan. Or they will ask you to sign up for a minimum percentage to participate.
While you never want to turn down putting money into a 401k, you’ll likely need more than the minimum to support yourself later in life.
As a young person, you might be tempted to only do the minimum because your income is low. Pay attention to your investment plan each time you get a raise. Make sure you increase what you put away as your income increases.
If not, you may find you’ve reached retirement years and don’t have enough money put away.
As an investor, one thing you need to consider is your risk tolerance. Often the riskier the investment, the greater potential for gains, or losses.
When you invest in a 401k plan, you can designate where you want your money invested.
It’s important when investing to diversify. Have your money in a combination of stocks and bonds.
It’s also important to revisit how you have your money arranged and consider how well it’s growing where it is.
Use These Strategies to Maximize Your 401K
The simple truth is that you are putting money away to make money and prepare for a comfortable retirement. Use these strategies to maximize your 401k plan and make it work for you.
If you’re in the Greater Houston area and need advice on your investing strategy, we can help. Contact us at Bogart Wealth to get the independent wealth management advice you need.