401(k) Do’s and Don’ts

Jared BrysonBy Jared Bryson

Does your company have a 401(k) plan?  Do you contribute to it? Are you aware of the rules in your 401(k) plan?  You don’t need to be an expert, but you should work with one!

What does your 401(k) plan allow? Does your employer provide a company match to your contributions?  If so, contribute to get the maximum they will match. If someone offers you money, take it!

Start early. To have $1 Million by age 65 you need to save $400 per month earning about 7% interest starting at age 25.  If you wait, you’ll need to save $2,000 per month earning 7% starting at age 45. Starting earlier with smaller amounts will ease the burden and anxiety in later years.

If allowed, contribute to your 401(k) when you are given a bonus. Stay consistent, the added savings will help in the long run and in your current tax liability.

Where possible, make the savings based on a percentage of your income. When you’re given a raise, your savings will increase automatically. The difference in your retirement funds is tremendous and the difference in your paycheck is minimal.

Is there a vesting schedule to the company match?  While this isn’t always the case, some companies require you to work with them for a period of time until you “own” the company match.  Be aware of the vesting schedule, if it applies.

Diversify: Make sure you are comfortable with how your money is working for you. What stocks, bonds, mutual funds, indexes or other options do you have available to you? Spreading money into many subaccounts and funds doesn’t mean that it is diversified. What are the objectives and goals of each? Are you comfortable with those goals and objectives?  Get help from a trusted professional. Review your plan periodically (annually or when there are significant changes in your life).

Maximize whenever possible. Before age 50 you are generally allowed to save up to $18,000 per year, or $750 if you are paid twice per month. After age 50 the IRS allows you to “catch up” by saving up to $24,000 per year, or $1,000 per check. 

The majority of 401(k) questions are asked during the transition between jobs. Most financial consultants agree that when you change jobs, you should take your 401(k) with you.  However, there are multiple options. Consider each before making a decision. 

You also have an option to withdraw the money, but before age 59 ½ you’ll face an IRS penalty of 10% as well as pay income taxes. Withdrawing the money is a tremendous loss and should be avoided. 

Your 401(k) can be moved to your new employer’s plan (if allowed). The rules and options of the new employer’s plan are the main factors to consider. What are the fees and costs of the new plan?  Are there funds and options in the plan that meet your current goals?

You also have the option to roll over your 401(k) to an IRA. There are no taxes due as long as it is a Traditional IRA. IRAs generally have many more options. From guaranteed accounts to individual stocks and mutual funds – all options are now available. Fixed Indexed IRAs are an excellent option for retirement money. They remove any chance for loss coupled with the potential for more than the fixed rate; this is a tremendous value for many savers. As a note, you should at least consider converting it to a ROTH IRA when you roll it over (or at a later time). The value of your account will be taxable at the time of conversion and a tax advisor should be consulted before making that transaction. Is the future benefit of the ROTH IRA worth the taxes you pay when you convert it?

Will your previous employer’s 401(k) plan allow you to leave the money there? Are you worried about legal protection of your retirement funds?  Will you be able to adjust the plan in the future if you leave it? If you have many years of purchasing company stock in your old 401(k), you may want to keep the money in the previous plan. When you retire, taking withdrawals from the company stock in a 401(k) can be taxed at a lower rate. However, there is still substantial risk in keeping the investment in a single company stock, especially over a longer period of time.  Discuss your options with a financial consultant that understands “net unrealized appreciation” if your account involves company stock, or even if it doesn’t!

Jared Bryson is owner of The Bryson Group in McKinney, TX.

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