investing

4 Tips to Build a Better 401(k)

Keys to getting the most out of your plan.

The amount of money in your 401(k) could mean the difference between taking an annual cruise in retirement and having to move in with your kids. Here’s how to get the most from your plan.

Start saving early, and save as much as possible. “If you just increase your contributions by one percentage point a year, that will help you attain your goals,” says Daniel Lash, a certified financial planner in Vienna, Va. Of course, you’ll want to contribute at least enough to get the full employer match. Many experts say your retirement savings goal should be 15% of income, including any employer match.

Pay attention to fees. Fees for large 401(k) plans have gone down, but some employers are still charging too much. Enter your 401(k) funds’ ticker symbols at Morningstar.com and click the “purchase” tab to find out which share class your plan is offering. If the share class in your plan isn’t the lowest-cost available, ask your company why. Companies are required to disclose fees they extract from your account to cover administrative costs. You can find this information on your quarterly fund statement. You can also get an idea of how your plan’s costs compare with others of similar size at Brightscope.com.

If your employer turns a deaf ear to requests for lower-cost options, you may want to limit the amount you invest in your plan. Contribute enough to get the match and invest the rest of your savings in a low-cost Roth IRA.

Don’t treat your 401(k) like an ATM. Early withdrawals can leave a permanent hole in your 401(k) plan. You’ll pay income taxes on the money, and you will likely owe a 10% early-withdrawal penalty if you’re still working. Most 401(k) plans offer loans, but if you leave your job before you repay the loan—either by choice or because you lose your job—you’ll usually have just 60 to 90 days to pay off the balance. Otherwise, you’ll have to pay taxes on the balance, plus a 10% early-withdrawal penalty if you’re younger than 55 at the end of the year you leave your job. Plus, the amount you borrow won’t be invested in the market.

 

If your employer doesn’t offer a 401(k) plan, ask why. Meghan Murphy, director of workplace programs for Fidelity Investments, says she has visited start-up companies that offer perks ranging from dog grooming to cold-brew coffee—but no 401(k) plan. A survey by the Pew Charitable Trusts found that one-sixth of employers that don’t offer a 401(k) plan believe their employees aren’t interested in having one. Tell your boss that you value a retirement plan even more than free caffeinated beverages. If you work for a small company, you may have a better chance of finding someone in management who will listen to your concerns, Murphy says.

Most Popular

Will Your Stimulus Check Increase Your Tax on Social Security Benefits?
Coronavirus and Your Money

Will Your Stimulus Check Increase Your Tax on Social Security Benefits?

The answer to this question comes down to whether your stimulus check increases your "provisional income."
March 1, 2021
Third Stimulus Checks Are One Step Closer to Reality – How Much Will You Get?
Coronavirus and Your Money

Third Stimulus Checks Are One Step Closer to Reality – How Much Will You Get?

The House passed President Biden's $1.9 trillion stimulus package. While the bill faces hurdles in the Senate, the provisions authorizing another roun…
February 27, 2021
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021

Recommended

8 Insurance Products You May Not Need
Financial Planning

8 Insurance Products You May Not Need

You may be paying for insurance, such as long-term disability or product warranties, that is potentially unnecessary.
February 26, 2021
Roth IRA Basics: 11 Things You Must Know
Financial Planning

Roth IRA Basics: 11 Things You Must Know

A Roth IRA can be a great way to save for retirement since the accounts have no required minimum distributions and you withdraw the money tax-free.
February 25, 2021
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
February 24, 2021
Buying a Burial Plot Is a Grave Decision
Financial Planning

Buying a Burial Plot Is a Grave Decision

Thinking about buying a burial plot can be uncomfortable but making this purchase ahead of time has its advantages, including potentially saving you m…
February 17, 2021