401(k) retirement plans are among the best savings vehicles that many employees have to save for retirement. But there are certain dos and don’ts you must be aware of to maximize the effectiveness of your plan.
1. Do contribute to your company’s 401(k) plan up to the amount that your employer will match your contributions. It’s free money. Therefore, it’s a no-brainer decision.
2. Don’t contribute more than what your employer matches. The expenses are high with 401(k)’s. And the investment choices are limited. Also, you will pay taxes on the gains when you retire.
3. Do contribute to a Roth IRA for contributions over and above what your employer matches with the 401(k). With a Roth, you will not get a tax deduction on contributions. But your earnings grow tax-free. And – here’s the big one – earnings are tax-free at retirement. For most people, having tax-free retirement income is better than being able to make contributions with pre-tax dollars.
4. Do get started saving as early as possible. Whether it’s a 401(k) or an IRA, begin saving as soon are you’re eligible and save consistently and persistently. The power of compound interest or any compounded rate of return is an amazing force. But compounding works over time.
5. Don’t worry about it if you did not get started saving early. It’s never too late. It’s amazing what can be accomplished in five or ten years. It’s just that you may have to save more than had you started earlier.
6. Do learn all you can about your investment options. One reason people don’t retire with as much money as they had hoped is that they make poor investment decisions. Prudent diversification is still your best bet.
7. Don’t be a victim of 401(k) “leakage.” According to Market Watch, “One in four 401(k) participants has, at some point, raided his or her 401(k) savings to cover non-retirement expenses, including mortgages, college tuition, and credit card bills.” Instead, save for non-retirement financials goals separately. Don’t raid your 401(k).
Follow the 7 dos and don’ts and your 401(k) will be a powerful savings vehicle to help you reach your retirement goals.