- 1 The Do’s
- 2 The Don’ts
Managing a successful financial portfolio self-directed 401k requires meticulous attention to critical aspects. Here we will discuss some of the Do’s and Don’ts to help you capitalize the most from a 401k plan.
1.Do take part in your plan
If your employer has setup 401k plan for you at workplace, start contributing to it. Bank of America Merrill Lynch states contributing to a workplace 401 k plan is one of the best was to improve to improve your financial well being. To save and invest drives financial wellness. The plans that see participation from 80% of eligible employees are the healthiest. Such 401k plans have self-triggered enrollment for eligible employees; auto increase, wherein regular automatic upward adjustment for the salary percentage contributed by employees takes place. Workers also receive prudent investment advice.
2.Do shun risky behavior
There are patterns that constitute risky behavior that should be avoided. The following are some behavior patterns to look out for: personal 401 k loans exceeding to 25% or greater of the entire 401k account balance and not using the professional advisor’s experience to establish an investment strategy. Other factors to be wary of are; not taking advantage of asset allocation or target date funds, too narrow a focus in particular asset classes including company stock and failing to take complete advantage of company match. Contribution rates of less than 2% are another danger signal.
3.Do raise the contribution rate
You should attempt to raise the contribution level in your 401k plan. The healthiest 401k plans see an average contribution of 8.5% from workers. Experts comment that a mere increase of 1% or 2% of salary contribution can dramatically impact your retirement savings.
4.Do overcome inertia by putting the plan on autopilot
Sloth is bound to get the better of us even if we experience a pay raise. You should take advantage of the automatic escalation and automatic rebalancing tools offered by employers to up your contribution to 401k.
5.Do use expert advice
401k plans which offered counseling to participants saw the schemes fare relatively well than the plans that didn’t. The benefits of advice are undeniable. Researches show that employees who seriously took and implemented investment help had better annual returns. You should delegate account management to external professionals if offered by employer.
1.Don’t give away free money
Do not keep your contribution to 401k plan less than the match provided by employer. You should adequately contribute to take full advantage of the employer match.
2.Don’t take your cash out
If you have moved out of your current job or are contemplating such a move do not take the money out of your 401k savings in the form of a distribution. The research conducted by Hewitt indicates that on an average 46% of employees tend to cash out in such circumstances. If you are planning to do so, you should be aware of the tax consequences and long term harm to your retirement plans. In most cases, any distribution before the age of 59 ½ will result in an IRS 10% SURCHAGE on top of the income tax due. For example, you change jobs and have $50,000 in your company plan. This money has never been taxed. If you decide to take a distribution, it is the same as adding an additional $50,000 to your income for that year and in most cases will push you into a higher tax bracket. So you will get hit with a higher tax rate PLUS the 10% IRS penalty. On average you can lose 40% of your retirement funds AND they can never grow again in a tax-deferred manner. In most cases this is not a prudent decision, once again stressing the importance of using an experienced tax professional or financial advisor.
3.Alternatives to taking a distribution.
A company 401 k plan is a “qualified” plan meaning the contributions are pre tax and the growth is tax deferred until a distribution is taken. There are other “qualified” plans available to persons changing jobs and in a lot of cases make much more sense. The most common approach and the one most financial advisors recommend is to “roll over” or “transfer” the 401 k monies into a traditional IRA. There are many IRA custodians who are more than ready to help you do this. The two biggest advantages are: your money is no longer in your company’s plan (with limited investment choices and the chance the company can fold) and your new custodian will have many more investment options. Rollovers or transfers are not a taxable event – you were simply moving from one qualified account to another.
4.Don’t put too much money in company stocks
If you are investing too much in company stocks, you are essentially tying up your financial capital and your human capital to your employer. In the event of financial ruin coming down on your employer, you run the risk of losing a significant portion of 401k investments apart from losing your job. Market analysts recommend that one should restrict the investment to 10% of your 401k plan to company’s stocks. Currently, the trend for most employees is 18% of their company 401k money invested in employer’s stocks.
At Self Directed Retirement Plans LLC we help clients with these decisions every day. Generally, moving your old 401 k money into an IRA is a good idea. There are many good custodians eager to help. However, we take the extra step and create totally true check book controlled self directed IRA’s for our clients. This opens up the whole world of alternative investments such as real estate, tax liens, precious metals etc. It is important to seek experienced advice when moving your old 401 k. We do not have products to sell, our specialty is establishing a qualified plan which allows our clients to really have all the legal investment options allowed.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He brings over 30 years of diverse experience as a financial advisor. Rick takes great pride in giving honest and very experienced advice. Rick can readily converse with business owners and people looking to take control of their retirement accounts.