401k Mistakes to Avoid in 2011
If you’re determined to improve your financial situation in 2011 and protect your 401k, you’ll need to make sure you’re not making some costly mistakes this year. Even though the economy has slowed and we are still in the midst of a recession, it’s important to continue contributing to your 401k, up to your contribution limit whenever possible. Many people make the mistake of not contributing when the market is down so that they can save money .However, this can be a risky move and reduce your tax benefits in the long run.
Here are some 401k mistakes to avoid in 2011:
1. Borrowing against your 401k. If you’re strapped for cash and turn to your 401k for help, you could be losing a lot of money in the long-run. Tap into an emergency fund or look for other resources if you need to cover some costs. Borrowing against your 401k in 2011 is not a good idea and you could end up lose lots of tax benefits and money.
2. Putting your 401k funds into a money market account. Even though money market accounts may seem less risky than a 401k and offer a high return on your investment, they don’t have the same tax advantages and benefits as a 401k account. Avoid transferring your 401k funds into a money market account and focus on building up your 401k instead. Use other savings and funds to put towards a money market, if you feel that you have found a good interest rate.
3. Suspending 401k contributions. As stated earlier, many people make the mistake of stopping making contributions to their 401, account because they want to save money, or feel that the market is fluctuating too much and having a 401k is a risky venture. Suspending your 401k contributions can be a risky move itself and will limit the amount you will be able to save over the course of the year. Remember that you can continue contributing to your 401k up to the contribution limit, so be consistent about it and make a commitment to stick with it. Your 401k retirement account will always be a work in progress and something that you will need to keep building, regardless of the state of the economy.
Protecting your 401k account in 2011 and making some wise financial decisions will help to improve your financial position. Keep these 401k mistakes in mind when you are reviewing your 2011 financials, and look forward to a solid retirement plan in the near future.
Tags: 401k advice, 401k mistakes, 401k tips
Tips for Keeping Your 401K on Track
Even when you’re dealing with economic hardship or are troubled by the economy, it’s important to keep your savings strategy on track and keep contributing to your 401k account. 401k plans are designed to provide you with financial security when you are no longer able to earn an income with a regular job. Whether you choose to retire early or are planning for a standard retirement, it’s important to set up a 401k contribution plan and savings strategy that works for you in the long-term.
For many people who are employed full-time, the 401k account is already set up and their company is contributing to the account along with their regular contributions. Those who are self-employed or want more control over their 401k account will need to seek out the help of a financial advisor so that they are making the right choices with their investment strategy.
Here are some important tips for keeping your 401k on track:
- Contribute more when your income goes up. If you get a salary increase at any point in your career, make larger contributions to your 401k. Some employees are subject to automatic increases for their 401k plan contributions when they get a raise, so find out if you are eligible for this by checking with your human resources representative. If the increase is not automatic, you will need to contribute more individually. Talk to a financial advisor on what this process entails so that you don’t miss out on the opportunity to build up your savings account.
- Consider building your portfolio on your own. If you’re willing to take some time to learn about your investment portfolio, learn about the different investment options available to you so that you are making the best choices with your savings account. Sometimes the “default” options aren’t enough to prepare you for a comfortable retirement, so you may need to explore other types of accounts and investments. Talk to a financial advisor to learn more about your options.
- Don’t withdraw money from your 401k at any time. Taking money out of your 401k account prematurely can prevent you from getting the highest return on your investment. Do whatever you can to avoid having to withdraw from your 401k account or you could end up paying high fees and a tax penalty on the balance. Consider as many alternatives as you can for coming up with cash you need, and protect your 401k.
Tags: 401k basics, 401k tips
Tips for Managing Your 401k in the New Year
If you’re trying to save money for retirement and build your 401k, the New Year is a great time to evaluate your financial plan and make some important decisions about your finances. Many people don’t even take steps to participate in a 401k retirement plan for several years and miss out on saving a significant amount of tax-deferred deposit money. One of the keys to building a 401k is to start as early as possible and to keep contributing no matter what the economic climate may look like.
Use some of these important tips for managing your 401k in the New Year:
Do an Annual Review
If you have been diligent about contributing to your 401k over the past few years, the New Year is a good time to do an annual checkup. Take a good look at how your account is performing and consider the state of the stock market. If you think you may have more money available to contribute to your 401k in the oncoming year, talk to a financial advisor about your options. Your advisor may be able to restructure your account and recommend other investment products that will help you maximize your investments.
Make a Commitment Not to Withdraw Early
401k withdrawal rules and penalties are fairly strict and stay relatively the same from year to year. If you withdraw from your 401k this year, you will probably have to pay a 10% early withdrawal penalty and those funds will be considered income on your tax return. Withdrawing early can take away from the value of your investment that you’ve worked so hard to build, so make a commitment not to touch your 401k this year. Letting your funds grow is still the best personal financial strategy.
Transfer Funds if You Change Jobs
If you end up changing jobs this year, make sure you are able to just transfer the funds from your account instead of rolling over to an IRA. People who leave their jobs and do a rollover usually end up paying fees and taxes that equate to up to 20% of their investment. This can be a high price to pay for your own saving account, so find a way to simply transfer your investments to another account. Transferring your account instead of rolling it over will help you avoid those extra fees, taxes and other charges, leaving you with much more money in your account.
Best Retirement Plans for Small Businesses
Having a 401k account or traditional IRA offers a number of tax advantages and can make it easier to save up for retirement. If you’re running a small business, you will need to decide what types of retirement plan or 401k accounts your employees should have. Some employers choose to match their employee’s contributions up to a certain amount, while others set up a simplified employee pension plan.
In many cases, the employees of a small business can still make contributions to their traditional IRA or Roth IRA on top of employer based plans. Here are some of the best retirement plans for small businesses:
Simplified Employee Pension Plans
Simplified Employee Pension plans (SEPs) only allow the employer to make contributions to the account. The tax-deductible contribution limits are much higher than a simple IRA and typically equate to up to 25% of employee compensation. Employers can set up a SEP-IRA up to the date the tax return is due, including extensions, for the year that they claim the tax-deductible employer contribution.
Individual 401k Accounts
An individual 401k account requires less administration and management than a traditional 401k and allow for contributions up to 25% of compensation and an additional salary deferral benefit. Employers are allowed to establish these types of accounts before the end of the year and can make contributions by the tax-filing deadline.
SIMPLE IRA Accounts
Small businesses that want to make a small matching contribution of 1% to 3% of their employee’s compensation can set up a SIMPLE IRA account for each employee. With this account, employees are allowed to contribute 100% of their income up to the annual limit. Employees who are 50 years of age or older are entitled to contribute an additional $2,500 as a “catch-up” contribution for any given year.
Most of these retirement accounts are fairly easy to establish and maintain, and small business owners can work with a personal financial advisor or accountant for recommendations on a plan that best fits their needs. Different types of plans and accounts are subject to various types of tax benefits and advantages, and each has its own set of contribution limits. Small business owners who want to set up their own retirement savings account or contribute to a self-employed retirement plan also have several options available.
If you’re running a small business and want to offer a more comprehensive benefits package to your employees, consider any of these attractive retirement plans.
Tags: 401k, ira account, retirement accounts
How to Increase Your 401k Performance
Gauging the performance of your 401k can be difficult, especially if you don’t manage your 401k accounts yourself or if you’ve hired a financial advisor to handle your 401k accounts on your behalf. Still, it pays to check the performance of your accounts from time to time, and look for any patterns that may indicate it’s time to change up your portfolio. There are several things you can do to increase your 401k performance, and the first step is to review your accounts periodically.
Some of the best ways to increase your 401k performance include:
1. Never borrow out of your 401k account. Keep on building up that account and avoid the temptation to withdraw some funds or the entire amount in your 401k at any time. Withdrawing early can lead to penalties and eliminate the net worth of your retirement account. The government will make you pay penalties plus interest on an early withdrawal, so the best way to maximize your 401k investment is to keep all of those funds as safe as possible.
2. Always contribute the maximum amount year after year. Each year, the IRS sets a maximum contribution amount for 401k accounts. Make sure you know what this amount is so that you are contributing as much as possible to your 401k retirement. You’ll enjoy ongoing tax benefits and can look forward to a great retirement fund in a few years or decades.
3. Learn about options to diversify your portfolio. Talk with a financial advisor about your options for diversifying your portfolio. You have to make some solid decisions about investing your funds month after month, and want to stick with high-performing, low-risk investments whenever possible. You won’t know what these are until you speak with a professional. Do your homework and find out what your options are so that you can make the most informed decisions about your 401k accounts.
4. Avoid buying company stock with your 401k. Some people choose to diversify their 401k investments by buying company stock. This can be very risky, especially during a turbulent economy. Avoid taking this risk and maximize your 401k performance by investing elsewhere.
5. Don’t underestimate your losses. If you are monitoring your 401k performance year after year but are only comparing the gain or loss between periods, you could be seriously underestimating your losses. Take the time to really learn how your 401k accounts are performing so that you can decide if you are making the wisest financial decisions for the long-term.
Tags: 401k, 401k accounts, retirement, retirement accounts
5 Tips to Manage Your Personal 401k Accounts Better
Whether you’ve just started investing in a 401k or have been contributing to a retirement account for several years, there are several things you can do to manage your personal accounts better.
Use these five tips to manage your personal 401k accounts so that you maximize your return:
#1: Ignore Market Panic
The media is very good at creating a sense of panic and urgency when the stock market tumbles or when investment accounts seem to be taking a nosedive. Don’t fall into the habit of keeping up with news from Wall Street because this will only make you more fearful than you need to be. Ignore the market panic and get yourself ahead by talking to a financial advisor.
#2: Get Help from a Financial Management Company
Some employers have partnered with financial management companies or offer financial planning services to their employees. You may also be able to get some professional help from a financial advisor from your local bank or credit union. Getting help from a financial management company can make it easier to review your options and really gauge the performance of your 401k accounts.
#3: Choose Your Investments Wisely
If you’re a first-time investor, make sure you’re investing your 401k in funds that have a strong return history. It can be tempting to invest in the latest stocks that seem to be doing so well out of the blue, but these can also be more risky. Stick with funds that have shown a good return history for at least three to five years so that you can play it safe while still getting a solid return on your investment.
#4: Focus on Long-Term Goals
Investing in a 401k account is a long-term financial decision, not a get-rich-quick strategy. You will need to focus on contributing the maximum amount possible each year and avoid the temptation of withdrawing some funds or the entire amount from your 401k early. As long as you focus on the long-term returns, you won’t have a need to withdraw early – and pay heavy penalties and taxes on the withdrawal.
#5: Don’t Wait for the “Right Time”
There really is no perfect time to start investing in a 401k account, so don’t wait for the “right time” to open a 401k account and start investing. Get into the habit of contributing to a growing 401k account so that you can build a solid investment for your retirement. The sooner you begin, the easier it will be stick with your long-term financial goals.
Important Things to Know About Your 401k
If you’re like most people, you wait until the end of the month or the end of the year to find out how much your 401k investment accounts are worth. In order for your 401k investments to pay off in the long run, it’s important to avoid making some bad investment choices and financial decisions during the year, and also be aware of some rules and limitations that apply to your account. Here are some important things you need to know about your 401k:
Taking Out 401k Loans
If you borrow a 401k loan from your employer and you end up getting fired or leave the position, you will have to pay the 401k loan immediately. You will also be responsible for paying an early withdrawal penalty and local state taxes. Avoid borrowing any money from this account whenever possible, especially if it’s part of an employer contribution plan. Look for alternative funding options when you’re strapped for cash and need a loan!
Rolling Over Your 401k Balance
If your 401k balance is less than $5,000 and you end up quitting your job or get fired, you will need to take steps to roll it over to an IRA or your new employer’s plan as soon as possible. A delay in this process may result in early withdrawal penalties and tax payments. Make sure you understand what the grace period is when you leave your job and acquire a new one so you’re not subject to these extra fees and penalties.
Investing in Variable Annuities
Some 401k plans include an addendum where you can invest in variable annuities. These plans are typically offered by insurance companies and promoted as giving you a tax benefits. The truth is, you’ll already be in an advantageous position simply by investing in a 401k plan. You should just continue to invest in your 401k plan and avoid withdrawing early. Most people don’t need to invest in additional annuities to take advantage of the tax break.
401k Investment Fees
Do you work for a small company or firm? You may already be paying significant fees just to keep your 401k account active. Some employers set up 401k accounts that are subject to investment transaction fees, record keeping fees and other administrative charges. Find out what fees you are paying for, and consider transferring your investment accounts to another provider to save some money. Your decision could pay off significantly in the long-term.
Essential Tips for Managing Your 401k in this Economy
Now that the economy is slowly recovering from the recession, it’s time to make some important decisions about your 401k investments and other accounts. Learning how to manage your 401k during both turbulent and “safe” times is an important element of financial success, so it can help to sit down with your financial advisor to discuss your options. 401ks are among the most common investing tools many companies offer their employees as a benefit.
Since it’s your responsibility to manage your 401k account, you’ll need to make timely and informed decisions.
Here are some essential tips for managing your 401k in this economic climate:
1. Set up a meeting with an investment expert. Even though friends and family members may offer you advice on how to manage your money, it makes better sense to speak with a financial advisor. Set up a meeting with an investment advisor to discuss different account options available, and the rates of returns on your investments.
2. Don’t wait to set up your investment accounts. Some people make the mistake of closing out their 401k investment accounts during an economic downturn and want to wait until the market improves before investing again. Don’t make that mistake! Keep on contributing to your 401k retirement account so that you are still storing away some tax-free dollars. Your hard work will pay off in the long run.
3. Avoid an early distribution. Early withdrawals can completely eliminate the benefit of having a 401k account, so don’t make the mistake of withdrawing early when you’re low on cash. You will end up paying penalties and taxes on the withdrawal, and it can take you several years to rebuild your account. Look for alternative ways to obtain money, and keep your 401k investment safe.
4. Make sensible and informed choices on type of funds. Identify the mutual funds that offer the best returns, and do your homework to find those that have three to five years of good return history. Consider several types of investments for your portfolio, and don’t be afraid to ask your financial advisor for a recommendation.
5. Consider reallocating your investments. It’s usually a good idea to allocate your investments over several different accounts. This strategy can yield a higher return, and may be the best retirement investment strategy for you. Work with a financial advisor or 401k specialist so that you can make the best decisions when selecting between different accounts.
Easy Ways to Strengthen Your 401k Accounts
You probably already know how important it is to save for retirement, and when you’re doing your best to build up your 401k account, you can improve your financial standing by making a few key decisions. Strengthening your 401k accounts will help you maximize your investment and ensure that you have a solid amount of funds available when you retire. Here are some easy ways to strengthen your 401k accounts:
1. Keep on contributing no matter what the economy looks like. Many people make the mistake of stopping or reducing their contributions to their 401k during a recession or economic downturn, but you don’t have to be fearful about investing during turbulent times. You may have lost some of your investment, but it’s important to keep on contributing and “ride out the storm”. In most cases, a recession makes it a great time to buy, so if you have the funds available, consider expanding your portfolio and making larger investments – and look forward to a higher return.
2. Understand your risks. If you are within a few years of retirement, make sure you understand the risks involved with withdrawing from your account and overinvesting. Consider how your actions now would affect an account you have spent decades to build. You can learn more about this by talking to a financial advisor.
3. Be patient. Don’t expect too much too soon from your 401k. Take small steps to build a solid account and invest in the lowest-risk investments as you build so you that are not vulnerable to market turbulence. Be patient as you watch your investment grow and you will get the highest returns on your investment.
4. Don’t borrow from your 401k account. Even when times get tough and you are low on funds, don’t make borrowing from your 401k account an option. Protecting your account should always be a priority, and you need to find other ways to stay ahead financially if you want to make the most of your long-term investments. Take the time to review all of your financial options when you need financial assistance so that your 401k account remains untouched.
5. Learn about your 401k fee structure and options. Sit down with a financial advisor to learn about the fee structure of your 401k account and review your options for investments. Find out if you are paying excessive service fees, and consider shopping around for better account options. Your financial advisor can introduce you to several plans that meet your objectives at the lowest possible cost.
Tags: 401k, 401k account, 401k benefits
Roth 401k Versus Traditional 401k Plans
The Roth 401k became available to employees interested in a retirement plan in January 2006. Since then, thousands of employers have added the Roth 401k to their list of employee benefits, and many employees are enjoying the value of tax-free withdrawals and the flexibility of this type retirement account.
The Roth 401k plan has many similarities to a traditional 401k, and can help you to increase your savings potential as you work towards retirement. Here’s a close look at the Roth 401k and its similarities and differences to traditional 401k plans:
How Roth 401k Plans Work
As long as you follow IRS rules, having a Roth 401k account allows you to enjoy tax-free income upon retirement. Roth 401k plans are investment accounts and is now offered as a benefit by many employers. The plan allows account holders to defer a certain amount of their after-tax income to build up a solid savings account for retirement. The contribution limits for Roth 401k are the same as those for traditional 401k plans, and this limit changes from year to year.
The Roth 401k is only available for employee deferrals, which means that any employer contributions, such as profit sharing, employer matching are not included.
Anyone who chooses to participate in an employer’s 401k or 403b plan is eligible for a Roth IRA account, and you will not lose eligibility if your income increases to a certain level. Employers simply provide a form where you can designate whether all or some of your contributions should go to a Roth 401k account.
Roth 401k Plans vs. Traditional 401k Plans
The simplest reason to choose a Roth 401k plan is that you will be able to maximize your tax-free income received after retirement. Roth accounts are typically more valuable because distributions from these types of accounts are not taxable. Building up savings in a Roth account can make you much wealthier than traditional savings accounts during retirement. Many financial experts emphasize that the Roth 401k plan will make you wealthier in the long run.
Some of the similarities between the Roth 401k and a traditional 401k plan are:
- Rollovers allowed
- Account holders can begin withdrawing funds after 59 ½ and are required to withdraw funds after 70 ½
- An early withdrawal penalty of 10% plus taxes is imposed
- Account holders can withdraw funds if they experience financial hardship, early retirement or termination of service
Making some sound investment decisions well before retirement can help you grow your savings within a few short years, and ensure that you will be paying less taxes on your income, no matter what your tax bracket ends up being.
Choosing a Roth plan may mean paying more tax in the year of the contribution, but this won’t reduce your taxable income. The main difference will be in the total amount you end up saving, so there is a very positive cumulative effect from this investment approach.
Tags: 401k, 401k advice, retirement plans, roth plans