Posted on March 11, 2021 in

Making the Most of Your 401(k)

Since their creation in the 1980’s, 401(k) plans have become one of the most popular ways to save for retirement. These plans offer workers, business owners, and self-employed individuals a way to save substantial amounts of money, and to save on taxes at the same time. Making the most of the retirement savings in your 401(k) requires some planning.

Save early and save often!

It’s never too soon, or too late, to start saving in a 401(k). If your employer offers a match, start by saving at least enough to get the full match. Every dollar you save in the plan is a dollar you don’t have to pay income tax on, so it makes sense to save as much as you can. For 2021, the maximum amount workers can contribute is $19,500 for those younger than age 50, and $26,000 over age 50. Business owners and self-employed individuals can save even more, with the right planning. A good rule of thumb is to save as much as you can comfortably afford, and then save a bit more. The money you save now is what you’ll be living on in retirement. Small sacrifices now can make a big difference in your future. No one retires on the money they spent!

Invest wisely in your 401(k)

Most 401(k) plans provide a wide variety of investment choices. Common investment options include index funds and target date funds. Some plans include proprietary investment products or mutual funds run by the company that administers the plan. Often these funds are much more expensive than normal index funds. When you are choosing investments in your plan, be sure to compare the fees and expenses of the investment choices. The investments you choose in your 401(k) plan should also reflect your risk tolerance and financial goals.

The best 401(k) plans include a fiduciary investment advisor to help make investment decisions and provide financial planning for participants. Unfortunately, most plans do not offer these benefits, and participants are expected to make their own investment decisions with little or no guidance. If you aren’t getting the advice you need from your plan provider, you can hire your own fiduciary financial planner.

Don’t forget those old 401(k)’s

When you leave an employer to take a new job, make sure you don’t leave your hard-earned retirement savings behind! During the excitement of a job change, it’s easy to put off decisions about what to do with your old retirement plan. When you leave a job, you have several options for moving your 401(k), 403(b), or 457(b) balance. These funds can sometimes be rolled into a new employer’s plan. They can also be rolled over to an individual retirement account. Both of these rollovers are tax-free, if done correctly.

401(k) plans are one of the best ways to save for retirement. For many of us, savings in a 401(k) plan will be the cornerstone of financial independence in retirement. Making the most of your 401(k) requires some planning and some financial discipline. Saving early, saving often, and investing wisely will pay off in the long run.

We’re here to help.

Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer