5 mistakes to avoid with a 401(k) plan

5 mistakes to avoid with a 401(k) plan

A 401(k) plan lets employees set aside a specific sum from their monthly paychecks and invest it in a special retirement savings account. Opting for this plan has several benefits. For example, one can choose from two types of 401(k) accounts (each with unique features) and avoid paying taxes on the money invested. Still, for a 401(k) plan to work effectively, one must steer clear of a few common errors.

Not investing enough
Individuals should regularly invest money in the 401(k) plan during their employment tenure to enjoy a good return after retirement. Not contributing to the account frequently, contributing a low amount, or not increasing the contribution to this account over time as one’s salary increases are all factors that may affect the plan. Individuals should note that they could invest around $22,500 in the 401(k) in a particular year while increasing the sum by $500 the following year. Those over 50 could put away an additional amount. Some plans enable users to automatically increase their contributions by 1% annually at a date of their choosing, which is highly beneficial. But one should note that the automated annual increase will stop once it touches 10%, or 15% in some cases.

Making a job switch before the vesting period
Most employers offer to match the employee’s payment to the 401(k) plan every month or at least make some contribution from their pocket. For instance, the employer may offer 50% matching on an employee’s contributions up to 6%. That means one would receive as much as 3% of their salary as an employer match. That said, individuals can only withdraw their employer’s share if they complete a set number of years in the organization. The vesting period differs depending on several factors but usually ranges between three and five years. While one could withdraw their personal contributions, they will lose the employer’s investments on leaving the company before the vesting period. So, individuals must always check the company’s policy before deciding to switch jobs, especially if they are heavily invested in a 401(k) plan.

Overlooking how the plan works
When someone sets aside money in their 401(k) plan, it is further invested in other avenues like mutual funds and stocks. A common mistake employees make is accepting the default investment options when signing up for a 401(k) and letting the plan be as is. Overlooking where the money is reinvested, the fees charged, or the performance of the investment funds is a big mistake. Such ignorance can cause one to receive a lower return. That’s why individuals should occasionally look at the investment options in the 401(k). While checking the investment options, one should also pay attention to the fees charged. The plan participants bear most fees, leading to a lower takeout during withdrawal. The 401(k) plan usually sends the investor an annual fee disclosure statement. One must read this document thoroughly. If the fees are higher than expected, one should consider investing just enough to qualify for the employer match and save other funds in an IRA, which allows one to invest in low-fee funds.

Making early withdrawals from the 401(k)
A common mistake that could affect one’s 401(k) savings is making an early withdrawal. Some people withdraw money from the account to meet expenses during financial difficulties. If one withdraws from the plan before age 59 and a half, they must pay a 10% penalty on top of income tax owed on the distribution. While most plans allow hardship withdrawal or loans, there might also be an associated fee. One might even miss out on certain investment gains the money could have earned.

Checking the balance too often
Some have the habit of checking the 401(k) investment often. While tracking long-term investments is a good idea, constantly logging in to check savings might derail the investment returns. If one checks the account daily or even weekly, it could make them anxious that the balance is not growing. One might also find that it is shrinking. So, one might panic and reduce their monthly contributions or halt the plan altogether. For the best results with a 401(k) account, one must stick to the long-term investment plan and maintain a positive outlook.

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