The company 401(k) is likely your best tool to use to save for a comfortable retirement. Here are a few tips for making the most of your retirement account.
Aim for the maximum. The IRS allows you to make a certain amount of tax-deductible contributions to your 401(k) each year. This means that you can delay paying taxes on the money you send over to your 401(k) until retirement. The maximum amount you can contribute is $16,500 in 2010. That's a lot of money for most earners, but it should be the goal. Saving this amount each year means you can breathe easier about retirement and pay less in taxes now.
At least get the company match. Many companies offer a matching contribution to retirement savers. At the very least you need to make sure you take advantage of this free money.
Contribute automatically. To help you save more in the long run, make sure your contributions are set up automatically. Most companies allow you to directly deposit part of each paycheck in a 401(k). People who do this often report that they never really miss the money. Using automation also leaves one less thing you have to remember to do each month.
Escalate your contributions. If you can't max out your contributions now, at least strive to increase your contribution percentage each year. Some companies have a feature that will automatically escalate your contributions. Instead of spending all of your raises, you will be, in effect, sending them to your 401(k).
Understand your fund expenses. The company 401(k) has a limited number of funds for you to choose from. You have to be careful that you are picking appropriate investments. Find out each fund’s expense ratio and use it as a factor to help you decide which funds to go with.
Review your allocation annually. You should review the mix of different asset classes you are in at least annually to make sure it still lines up with your age and risk tolerance. Only you know which investments you are comfortable using. As fund values fluctuate, you could be out of line before you realize it.
Think twice before borrowing. Your 401(k) should have one goal: holding your retirement savings. It really shouldn't be a place to get a loan. However, most plans do offer this feature. Before you take out a 401(k) loan you should understand that pulling your money from the market means you are potentially missing out on long-term gains. You are also missing out on current contributions and the match because some companies make you pay back the loan before contributing again. You are also risking that the loan will become due immediately due to a job loss.
Avoid taxes and penalties when you change jobs. To make the most of your 401(k), you need to treat it right when you leave your job. Ideally, you need to make sure that the tax advantages stay intact. You can do this by moving the money to a new 401(k), leaving it in the old 401(k), or by putting it into a rollover IRA. If you simply cash out the funds, you will likely face taxes and penalties to the tune of more than 25 percent of the balance.
Phil Taylor is the author of the popular 52 Ways to Make Extra Money. Find out how to save more money and get the latest news on the best online savings accounts and the best online stock brokers at his blog, PT Money: Personal Finance.