Live The Dream, Get Your 401k Account Up
You invest into your 401k account today so that someday you can live your dream retirement. And you only get one shot at investing enough money for retirement; your forty or so working years. For once you retire your opportunity to invest into a 401k account are over. Once you retire, you will be spending money, not investing it into a 401k account. So what will it take to retire someday on your terms? Well, you need to invest as much money as you possible can afford to during your working years but you also need to get your 401k account to grow, to increase in value.
Work Your Options
Tip #1 – Always Go The Max
The fastest way to build up your 401k account value is to always max-out the 401k contribution limit every year.
You can put a lot of money away just be maxing out your 401k contributions every year. These contribution limits are adjusted on an annual basis for cost-of-living increases. So stay up-to-date on those annual increases. If you are over the age of 50, be sure to also contribute the maximum catch-up contribution. Every year, that contribution amount also changes. Keep in mind that 401k contribution limits apply just to your personal 401k contributions. In other words 401k contribution limits do not include any matching contributions made by your employer.
It is okay if you cannot seem to find enough money to max-out your contributions when you first start investing. Just start your contributions with a low dollar amount. Be sure though to increase those contributions over time as you make more money from bonuses and raises. Remember, the only money that will be there when you reach your retirement years is the money you sent ahead during your working years.
One key to building up your 401k account is to diversify your investments.
You should spread your investment money into a few different investment choices to protect your account from risk. If you invest in different investment categories, when one category underperforms another category can make up the difference. The typical investment categories include large cap, mid cap and small cap mutual funds, international, bonds and cash or a cash equivalent such as a money market.
Most 401k plans are set up to offer some of each investment category, although every plan is designed differently. A good diversification strategy is to have some money invested in cash, some in stocks or mutual funds and some in bonds. If you are a younger investor, you can make more aggressive investments in international, mid cap or small caps. As you get older you will more likely invest more in safer investments such as large caps or bonds.
Tip #3 – Count The Ways To Take Advantage of Your Employer
If your employer matches your personal contribution, they are literally giving you free money. And, the best part is, the more you contribute (up to the maximum limits allowed by law), the more free money you get (up to the limit set by the plan). How’s that for taking advantage of your employer?
As an added value service to plan participants, many employers are starting to include within the 401k program a personal financial adviser to help participants manage their own accounts. These advisers can help you understand your investment options. Also, how the investment choices offered within the plan best fit your personal retirement goals, risk tolerance levels and overall financial direction. Some expert advice can help your 401k account grow. A financial adviser may offer investment guidelines that you were unaware of. If you already have your own personal financial adviser, work closely with them to maximize your investment opportunities.
Tip #4 – Watch Anything Called A Distribution
The 401k distribution rules can do damage to the value of your 401k account if you do not follow them correctly. Let’s review your options.
- When you retire, you can choose to not take a 401k distribution, but rather leave your 401k account balance in your employer’s plan until you are of the age when you have no choice but to take a distribution. Some employers will allow you to keep your 401k account in place during your retirement. If your investments are growing and you are content with the growth, it may be a good option for you. Check with your employer and tax accountant before deciding on this option.
- If you change jobs you can make your 401k distribution into your new employer’s 401k plan. This choice is called a 401k rollover vs a 401k distribution. Make certain that if you make a 401k rollover you follow the proper 401k rollover rules, otherwise you could pay taxes and penalties. The 401k rollover rules state that to avoid paying taxes, you personally cannot touch the money. This is accomplished by having the money transferred from one employer to the next without you taking possession of it. This is a sticky rule so be careful otherwise it could get expensive. If you decide to rollover your 401k account to your new employer’s plan, have the 401k company from your old employer work directly with your new employer and their 401k company.
- You can take an early distribution without putting the money into another qualified retirement plan (like an IRA or 401k). Be careful here. It may be called a distribution but if you take money out of a qualified retirement plan before age 59 1/2, it is really an early withdrawal. And an early withdrawal made from a qualified retirement plan before age of 59 1/2 will be subject to taxes plus a 10% early distribution penalty. Do your best to avoid an early distribution, it’s too expensive, and will destroy much of the value you have worked on building up in your 401k account.
Work Your Plan For Your Future
You work hard for your money so that you when get to retire you can take it easy. Focus on improving your 401k account value during your working years so that you make that happen. But do not make the mistake that some people make by thinking the only way to improve their account value is by just investing more. Investing as much as you possibly can is very important but you need to also watch other factors such as employer matches, portfolio diversification and distribution or withdrawal rules. Keep the big picture in mind while growing your retirement accounts.