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Your 401(k) is one of the best and easiest investments you’ll ever make. You don’t even have to do anything to start your 401(k) fund with most employers! They’ll simply set up your paychecks to defer a small part of them into your fund, and completely income tax free at that. But what’s the real kicker? 95% of employers make additional contributions on behalf of their workers, usually about 3% of whatever they put in to their 401(k). Your earnings will continue to grow tax-free until you withdraw them many years later. It’s no wonder so many people use them, but just having one won’t guarantee you a comfortable retirement. You’ll need to invest wisely in your 401(k), here’s some tips to make it happen:
Tips for 401(k) Investing
- Start investing in your 401(k) as early as possible! You may be tempted to hold out, especially if you’re not making the big bucks at your first job. Just keep in mind that the money you put into it is tax free and your employer may match your investments.
- Resist borrowing money from your 401(k) if at all possible. In most cases, you’ll have to pay back the loan from the 401(k) before you can start investing in your fund again, which could take several years. Taking out a loan from your 401(k) may also incur a fee, as much as $100.
- Many companies match their employee’s funds exclusively through their own stock. This means a large portion of your 401(k) could depend on the success of your employer’s stock. You can avoid this by diversifying your funds in different areas.
- While your employer may set up a 401(k) savings plan for you, you don’t have to actually follow it. You may not be contributing enough using their investment planning so consider creating your own strategy.
- Invest in your 401(k) as much as the limit allows. The limit changes over time, but is currently around $20,000 for people over 50.
- Talk to your financial planner before even thinking about withdrawing money from your 401(k), even if you’re at retirement age. Making mistakes in withdrawing from your fund could cause you to give up to 70% of your money back to the government in fees and taxes.
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