We all know we should be saving for retirement, but often other financial goals, like purchasing a home, or paying off high-interest credit cards and student loans, are made in its place – including making contributions to your 401(k).
However, while it may seem harmless in the short-term, neglecting your 401(k) can have serious consequences on your long-term retirement goals – but it’s not too late to get back on track. In this post, we’ll be sharing common 401(k) mistakes, and how to avoid (or recover from) them to keep your retirement goals within reach.
Saving Too Little, Too Late
The biggest mistake made by 401(k) holders is saving too little, too late in life. In order to save $1 million for retirement, you need to contribute about $1,000 to your 401(k) each month – for 30 years.
The earlier you start saving, the more time you have to build up savings. Additionally, you can make smaller monthly payments the earlier you start, so consider getting a head start on savings right out of college to avoid having to play catch-up later in life.
Not Taking Advantage of Employer-Matching
If you’re lucky enough to work for a company with a 401(k) matching program, you should be maximizing that annual match to reap the biggest rewards. However, many employees don’t take advantage of a full company match, and leave a lot of money on the table – money that could be going toward your retirement.
As we explained in a recent post, to maximize your employer-matched 401(k) contributions, you’ll need to balance a fine line between saving enough to get the maximum employer match, but enursing you don’t hit a $19,500 annual contribution cap too early in the year at the risk of missing out on company matches throughout the year.
Failing to Make the Most of Tax Breaks
Many 401(k) holders aren’t aware that, when you contribute money to your 401(k) plan, you can delay paying taxes on up to $19,500 (the maximum yearly contribution) of that cash. This means if you can make the full maximum yearly contribution each year, you can save on income tax until the cash is distributed from your account.
Ignoring Roth Options
Once you reach retirement, you can begin taking money out of your pre-taxed 401(k) savings. However, when you do this, the cash withdrawals are treated as taxable income. To avoid this, borrowers can open a Roth 401(k) to grow savings – tax-free. Just be sure to compare your options carefully to determine whether or not it makes more sense for you to receive the known tax benefits of using pre-tax savings today, versus the uncertainty of future tax savings in the Roth 401(k).
Forgetting about RMDs
Required minimum distributions (RMDs) reflect the annual amount you are required to withdraw from your 401(k) after you turn 72 years old. Your annual RMD amount depends on the balance of your 401(k) and life expectancy, but if you don’t take your RMD each year, you could be hit with a pretty sizable fine – one of up to 50% of the amount you were required to withdraw! So long as you meet your RMD, however, the costly penalty can be avoided.
If you’re already contributing to your 401(k) plan, you’re a step ahead in prioritizing your future financial wellness and retirement goals. As long as you contribute regularly and avoid these mistakes along the way, you’ll be on the right track toward a retirement full of financial abundance versus one filled with hefty fees.
The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, we advise you to consult with a licensed advisor.
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