If your company offers a 401(k) or similar employee retirement plan they are providing you with an important benefit. How do you make sure you are making the most of it and are not doing something to undermine your future retirement without knowing it. Sarah Halpin, Certified Financial Planner™ with The Danforth Group of Wells Fargo Advisors has some four common 401(k) savings mistakes and how to try to avoid them:
Mistake #1. Not Contributing or Cutting Back on Contributions to a 401(k) plan.
If your employer is offering a retirement plan and you are not already participating, sign up as soon as possible. By not contributing or not contributing enough you may be missing out on an employer 401(k) match to your retirement account. There are lots of excuses to trim your 401(k) contributions starting with rising living expenses and juggling other savings goals such as kid's college. But a 401(k) provides easy deductions direct from your pay check - out of sight out of mind as well as tax deferral benefits, which means you don't pay taxes until you take the money out in retirement. And remember, your kids may be able to get student loans for college, but you're not going to get a loan for retirement.
Mistake #2. Using your 401(k) Retirement Funds as a Bank. It may be comforting to know you can borrow or withdraw from your 401(k) as a last resort if money is tight. But borrowing or withdrawing funds from your 401(k) will have a negative impact on your account balance down the road. If you take a loan and then get laid off or accept an early retirement package, you'll probably have to repay the loan within a short time frame. If you can't repay the loan, it will be treated as an early withdrawal on which you'll owe income tax, plus a 10% penalty if you are under age 59 ½.
Mistake #3. Cashing Out your 401(k) Balance when you Switch Jobs or Leave with an Early Retirement Package. According to BrightScope, a 401(k) rating site, nearly half of employees withdraw their 401k savings when leaving one company for another. In general, you should ask your former employer to wire the funds from your 401(k) directly to an IRA or to your new employer's plan, if your new employer accepts rollover funds. If you don't request this, the company may cut a check to you, minus 20% withholding for taxes. If you find yourself with a check you have 60 days to complete the rollover to your IRA to avoid taxes and possible penalty.
Mistake #4 Forgetting to Change the Beneficiary on your Retirement Account when you have a Life Event Change such as, marriage, divorce or death of a spouse. While it doesn't directly damage your retirement savings, forgetting to change beneficiaries does have an impact on how your savings will pass to your heirs. Keep in mind that retirement accounts aren't governed by your will, so writing your ex out of your will isn't enough. You need to change the beneficiary. Also, name both primary and contingent beneficiaries. If your primary beneficiary dies and you do not have a contingent beneficiary there is the risk that retirement accounts will be paid to your estate, where they are at risk of taxes and creditor claims. Changing beneficiaries is completing a simple form.
Very few people start saving for retirement the day they enter the job market but the earlier you start saving and planning the easier it will be to reach your goal. A retirement planning calculator can help, such as the Wells Fargo Quick View Calculator or the Ballpark Estimate from the American Savings Education Council.
The information provided is general in nature and may not apply to your personal investment situation. Individuals should consult with their chosen financial professional before making any decisions. Investment services are offered through Wells Fargo Advisors, LLC member