Tips to Avoid the Most Common 401K Planning Mistakes

Planning your 401k is a responsibility you can’t take lightly. Even though 401k planning can feel a little intimidating, there are several things you can do to navigate your way through the process with ease. Many people make the mistake of simply not bothering about 401k planning until it’s too late – you don’t have to be one of them. Here are some ways to avoid the most common 401k planning mistakes:

1. Overlooking your company’s 401K policy. Does your employer offer a 100% or 50% employer match? What paperwork do you need to file to create your 401K plan? Do you get tax benefits? It’s important to learn about what your employer is providing, because 401k benefits vary significantly from company to company. Sit down with HR so you can learn about everything you are eligible for.

2. Borrowing from your 401k. It’s tempting to dip into your 401k when you need some extra money, but you’ll be losing a very valuable investment. Not only will you end up paying penalties and fees, but you will miss out on some tax advantages. Leave the 401k account alone and figure out other ways to obtain the funds you need.

3. Forgetting to rollover your 401k. When you leave a job, it’s critical that you rollover your 401k account to your new employer as soon as possible. Messing up this process can cost you, and you may end up paying  a fee just because your previous employer had to ‘hold’ your account. Get in touch with the HR department at both companies to make sure this transition is as smooth as possible.

4. Waiting too long to make a withdrawal. While it doesn’t pay to withdraw too early, you can also make the mistake of withdrawing too late. The IRS demands that all 401k account holders withdraw from their account the year they turn 70 ½. If you don’t make the required withdrawal by this time, you will end up paying a penalty of as much as 50% of your balance. Talk to your financial advisor to find out exactly what you need to do to initiate the withdrawal.

5. Failing to pay a 401k loan. If you do end up borrowing from your 401k, you have to make the repayment schedule a top priority. Missing a loan payment will result in a penalty and you may end up paying extra taxes.

Tags: 401k planning, 401k tips, financial planning