When it comes to 401K contributions, some people just don’t get it. A recent survey taken by AARP reports just that: Out of the 803 U.S. residents surveyed, more than 71% reported not paying any fees when they actually were, and 6% reported not knowing if they paid any fees.
Sure, it seems like a lot of information to take in, which is why most of us choose to make an initial election and forget about it. But take the time to understand how your 401K money can work for and against you and reap the benefits down the road.
Here are 5 things you need to know about your 401K.
- Employer match. Some companies nicely match your 401K contribution up to a certain percentage, and when you do have the option, contribute the max. But be mindful of limitations. If there is a 3-year minimum on that match, for instance, and you leave the company before your 3 years is up, there is no employer match to be taken. Make sure you know what limitations your company places on their match and if you don’t like what you find, see if there are ways you can work to change that plan.
- Borrowing fees. It’s comforting to think we have the money we’ve put away for our 401K available when we need it. But if you’re considering a job change or things aren’t going so well at your company, you may want to think twice about taking that loan. If you quit, get laid off or are fired, it’s likely you’ll have to pay the loan back right away. When you borrow from your 401K, the loan is treated as an early withdrawal and you’re left owing taxes on top of the 10% penalty. Just make sure you know what you’re getting into when you decide to pull money out of your 401K.
- Tax-advantaged investments. Retirement plans for nonprofit organizations and schools offer tax-deferred investments, such as variable annuities. But since your retirement plan is already tax-deferred, all you get are lower returns and higher costs with a variable annuity. Talk to your employee benefit management services provider about transferring a portion of your account into a 403(b)7 account. Make sure to transfer as a trustee-to-trustee to avoid an early withdrawal penalty. Also, if you have to pay surrender fees, the most you can transfer without a penalty is 10% annually.
- Contribution rates. 401K contribution limits typically stay in line with inflation rates from year to year. But with the cost of living adjustment (COLA) remaining the same this year as it was in 2010 and 2009, retirement plan limits are also staying the same. For people over the age of 50, it will remain at $16,500 while those under 50 can contribute up to $5,500. Those over 50 are also eligible to add an additional catch-up contribution of $5,500 at the end of the calendar year for a grand total of $22,000.
- But is it enough? A recent study shows that most retirees (between 60 and 62 years of age) will have less than half of the retirement funds necessary to maintain their current lifestyles. The takeaway? Work toward bulking up your 401K contributions as much as humanly possible to maximize your 401K contributions.
- Shifting money around. Most of us have spent time moving our investments around online, playing stockbroker every now and then. It is, after all, kind of exciting to watch your money grow. But when we start to get curious and make ill-informed decisions, we can get into trouble. You may be tempted to shift investments to last year’s top performers but avoid this temptation at all costs! Just because a fund did well in 2010, doesn’t mean it will do the same in 2011 – economic recoveries move in stages.First, decide where you want to be invested and then choose the cheapest fund that gives you the exposure you’re seeking. Consult an employee benefit administration professional if you have questions regarding how to invest your 401K money.