The 401(k) retirement plan is today’s hottest and most popular way of saving for retirement. Many companies offer this type of savings plan to their employees along with employer percentage matches, giving employees an even bigger reason to invest for their golden years. If you are not familiar with how 401(k) retirement plans work, you could find yourself employed longer than you had anticipated. Here are five mistakes to avoid when investing in a 401(k) retirement plan.
Do not sit on the sidelines.
Many young people entering the workforce think that retirement is too far in the future to seriously think about investing it, and they feel they can use the money now. They are wrong. Investing now will save you money, as the money deducted is pre-taxed. In 2010, you could defer up to $16,500 before taxes. If you employer provides a certain money percentage match, not investing is the same as throwing this money away. The earlier and more you save the earlier you will be able to retire, in style.
Do not invest foolishly.
How you invest your money in your 401(k) can hugely affect the time you will be able to withdraw your retire 401(k) savings. Investing too heavily in a concentrated area or over-diversifying, scattering you dollars in too many mutual funds can be unrecoverable errors. Although there are no guarantees, you need to try to find a balance. A good way to invest is to consider your current age, your risks, and the age you would like to retire. Adjust your investments as you age, backing off from risky investments to more stable ones as your retirement date grows closer.
Do not remove funds; roll them over.
If you lose your job for any reason, do not remove your funds. There currently is a 10 percent penalty for distributions made prior to age 59 1/2years of age. This is in addition to the regular tax owed. If you are changing jobs, you can roll your total amount over to the new company’s 401(k) plan or to an IRA or other qualified plan, without experiencing any penalties. You are usually given so many days in which to complete this type of transaction.
Do not borrow from your plan.
Although it is tempting and sometimes needed during times of dire emergencies, try not to borrow from your 401(k) plan. If you do, you have to pay it back with interest so you lose on both sides, meaning you pay interest, not gain interest.
Do not neglect to seek assistance.
If you do not understand how a 401(k) works, seek help. If you are unsure what or how to invest, seek help. To avoid the above pitfalls, find a financial adviser that you trust and ask for their professional guidance when it comes to your retirement money.
Source: American Funds