Many employers offer a retirement plan, such as a 401(k), 403(b), or the government's Thrift Savings Plan. These retirement accounts offer employees a great opportunity to take advantage of tax breaks when planning their retirement. But 401(k) plans and other retirement accounts aren't without their pitfalls, which could hurt your retirement security. Take a look at your 401(k) plan and determine if you are making some of these mistakes.
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Not taking advantage of your plan. The greatest mistake you can make is to dismiss the plan altogether. There are plenty of excuses you can make: It's too expensive. I can't afford it. It's too complicated. But all of these couldn't be further from the truth. You can't afford not to take advantage of these retirement plans and tax breaks. Another fact to keep in mind is contributions are made before taxes are withdrawn from your pay. So, a $100 contribution only reduces your take home pay by about $70, depending on your tax bracket.
Not receiving the full company contribution. Many companies offer a matching contribution based on a percentage of employee contributions. Failing to contribute enough to receive the company match is leaving free money on the table. This is part of your benefits package. Take advantage of it.
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Too much company stock. Holding too much company stock violates one of the first rules of investing: Diversification. When major companies like Enron and WorldCom folded, many people not only lost their jobs, but their retirement savings as well. If your job is your main source of income, then diversify your investments beyond your employer. You shouldn't keep more than a small percentage of your total portfolio in company stock.
Borrowing from your future self. Taking a 401(k) loan is rarely a good idea. Sure, you are borrowing from yourself and the interest you pay goes back into your retirement plan. But it comes at a price.You can't make money on your contributions when you remove them. This lost time could cost you thousands of dollars in the long run. You must repay your loan with after tax money. And your loan becomes due in full the day your employment ends, regardless of the reason. So a layoff could not only result in a loss of income, but the balance of the loan is due. Failure to immediately pay back the loan will result in taxes and penalties. In short, it's just not worth the risk.
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Having too many 401(k) plans. Employees tend to change jobs more frequently than they did in the past, leaving many people with multiple 401(k) accounts held by their former employers. It can be difficult to manage 401(k) plans when they are scattered about and you can lose track of your investments. A better option is to roll your old 401(k) plan into your new 401(k) plan when you change employers or roll your 401(k) into an IRA. An IRA generally gives you more control over your asset allocation and fees.
Ryan Guina is a U.S. military veteran, writer, and professional in the corporate world. He blogs at Cash Money Life and The Military Wallet.
Reader Comments Read all comments (2)
Ryan of NC 4:02PM October 12, 2010
Mike Menke of WI 10:42AM October 05, 2010