How To Get The Most Out Of Your 401k
It’s no secret, many (probably most) 401k plans suck. It’s still worth investing in your 401k, of course, but it’s not quite the slam-dunk many people assume it is. Here are a few things you can do to make sure you use your 401k for maximum benefit.
Review Your Plan
Carefully review how your money is allocated between the various asset classes such as stocks, bonds, real estate, and commodities. Studies show that over 90% of your returns are determined by your asset allocation, with the quality of the individual funds you choose within each asset class accounting for just 10% of your returns (which explains why trying to pick a great mutual fund probably isn’t worth the trouble).
Keep An Eye On Fees
Pay close attention to any fees assessed by your plan administrator. Most 401k plans are chock-full of ultra-expensive funds, but your plan’s mutual fund expense ratios are just the tip of the iceberg. Administrative fees, sales loads, and kickbacks are silently wiping out a good percentage of your returns..
Get The Maximum Match
If your company still offers a match, make sure you are contributing at least up to the maximum match amount, even if your plan is otherwise lackluster. If your plan is especially bad, it may pay to forgo your 401k entirely, opting to invest in a Roth IRA instead (if you’re eligible) or even a taxable account. You will have to do the math to figure out which is most likely to come out ahead, taking current and future anticipated tax rates into account.
Roll It Over When You Leave
I think the average 20-something can expect to change jobs something like ever 3 or 4 years. When changing jobs, you have four choices for dealing with your old 401k: roll it over to an IRA, roll it over into your new 401k, leave your old 401k where it is, and cash out. Of the four options, the first is by far the best in most situations.
RSS Feed
Email
Roll It Over When You Leave
I agree with this assertion in most cases. A self directed IRA is a wonderful choice. Just invest it the best funds per your asset allocation. Do not be tempted to invest in single stocks, penny stocks or options.
When you part the company over the age of 55 and are under 59@1/2 and you need the money do not roll it over.
Roll your 401K over to an IRA
You should have seen the look on the face of the HR director when I switched from my last job to my current job. I was hot to roll over my 401(k) because the choices at my new company were much better than the old, and I didn’t want my money sitting on the sidelines – this was at the bottom of the .com bubble crash and I didn’t want to miss a rally.
Anyway, when I asked him why he seemed so surprised at my insistence to follow up on the paperwork and the process he told me that most employees cash out their 401(k)s when they switch jobs.
It was then my turn to be flabbergasted.
Roll it over indeed!
I would be interested to see statistics on what percentage of workers takes each option. I personally know at least 3 people who have cashed out their 401k. Probably plenty more have and just don’t talk about it.