It is always advisable to sign up for the 401(k) plan that your employer offers. Although there is no guarantee that this plan will help you build your ideal retirement savings, the actual value of 401(k) is dependent on a number of factors such as the period before you retire, the amount you save as well as the performance of the stock markets.
Choose a Roth 401(k) account if possible
While your contributions to a conventional 401(k) is tax deductible, the money you save in a Roth 401(k) account is not taxed. This includes the money earned from capital gains, dividends and interest. Although opting for tax deduction seems to be a good choice, you may not save much by deducting 401(k) contributions.
Instead, it is better to avoid taxes on your earnings that will later account for a majority of your 401(k) account money. This is especially true if you are in between your 20s and 30s. This is because you are taxed relatively lower as you are not making much money at this point in your career, as you will in future.
If your company does not offer a Roth 401(k) account, you may then open the traditional 401(k) because the important thing is that you start saving for retirement early. Should your company offer a Roth 401(K) in the future, you may switch your future contributions there leaving past contributions in the traditional 401 (k) and grow your savings until retirement.
Start small and gradually increase your contributions
Reluctance to have more money withheld from paychecks is one of the main reasons employees shun 401(k) plans. Therefore, you can consider beginning your 401(k) plan with a little amount. Here is the thing; your contribution to a Roth 401(k) means a less amount on your paycheck. However, traditional 401 (k) contributions are not taxed and every dollar that goes into your account causes a reduction of your take home pay. You can manage with a less amount on your paycheck especially when this money will mean something along the way.
Go for the match
If you like free money, you will be pleased to know that your employer provides 401(k) matching funds. The laws that govern 401(k) accounts stipulate that employers match the first 1% of the savings you make dollar-for-dollar and an additional 50 cents for each additional dollar that you save up to 6% of your earnings per year. This translates to an extra 3.5% you could make in earnings. Thus, if you begin by saving 1% monthly, you can increase the amount gradually. Ultimately, you need to strive to save between 12% and 15% of your total income to your retirement accounts.
Put your money into a target-date fund
You don’t have to feel overwhelmed with the different options offered by different plans. Ensure that you go for a life cycle fund or target date fund. This is more like choosing a plan that is designed for the approximate year when you will retire, as the date will be in the fund’s name. Moreover, managers of the target-date funds take great risks when you are young buying stocks that have a high potential of increase effectively boosting the value of your self-directed 401(k) account.
Buy mutual funds with the lowest fees
Fees can relentlessly drain your retirement accounts by holding down gain whenever the markets are up and speeding up loses whenever stock fall. Therefore, when the fees is lower, your 401(k) is likely to make more for you. If you have to choose between target funds then go for the one that has lowest fees.
Watch but don’t touch
Mutual funds are best considered as long-term investments thus you need to be patient. If you are looking to build wealth over the next 30 to 40 years do not be shaken by the daily fluctuations of the market. Do not panic over possible loses during a downturn, instead stay back and watch.
Don’t borrow against your 401(k)
While you can borrow against your 401(k), it is advisable that you refrain from borrowing because you’re the money will no longer work for you. Thus, you have to figure out how to pay it back. Failure to pay back means the money is considered a premature distribution that is usually bad.
Self-Directed Retirement Plans, LLC is a leading self-directed IRA custodian offering superior service on retirement planning. We guide you through safeguarding your retirement accounts.
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.