Make your retirement account work for you.
There are many misconceptions when it comes to investing in retirement plans, but the wonderful thing is there are just as many ways to improve how you use your plan. If you are unsure whether you are fully taking advantage of your workplace retirement plan (and the enormous benefit of tax-deferred investment growth and compounding), here are 10 ways to make your retirement plan work even harder for you.
Participate.
This might seem obvious, but actually sign up. Companies are mandated by law to enroll employees into retirement plans automatically unless the employee opts out. This at least gets you started, but it falls short of optimizing your contributions. You may or may not be contributing enough to meet your retirement goals, and you may or may not be invested in assets that are appropriate for your needs. It is worthwhile to make these selections for yourself with your own goals in mind.
Don’t give up free money.
Check if your employer-sponsored retirement plan has any type of match and try to contribute at least the amount to get the full match. Match money is worth even more than you might think, since the contributions are pre-tax. You get the full bang for your buck from any matched dollars.
Maximize in a sensible way.
To get the full benefit of your retirement plan, you should maximize your contributions. The more you contribute, the more you are saving and growing tax-deferred for the future. There is a limit to the amount you can contribute tax-deferred though: For 2019, the max is $19,000. If you are over age 50, you may contribute an additional $6,000. The maximum usually increases annually. If your cash flow allows, increase your deferral to take advantage of the new maximum.
Increase each year.
If you’re not able to contribute the maximum amount, at least aim to increase your savings annually. Remember that when you contribute money to your retirement plan, it does not reduce your take-home pay dollar for dollar. Because your retirement plan contributions are tax-deferred, it is like buying dollars at a discount equivalent to your tax bracket. For example, if you earn $100,000 per year and want to contribute the maximum $19,000 (19 percent) of your salary toward retirement, it will only cost $12,924 from your take-home pay. Contributing $15,000 (15 percent), on the other hand, costs $10,200. Wouldn’t you like to only pay $2,724 in exchange for $4,000 in your retirement account?
Rebalance regularly, but not too often.
For most plan participants, rebalancing one to two times per year is likely appropriate. More often, you run the potential risk of short-term trading fees and timing the market. Less often, your allocation may drift too far from your target.
Don’t obsess about your daily balance.
This is especially important if you know you are a reactive investor. Remember that your investment time horizon for your retirement plan is long and doesn’t stop the day you retire. Your retirement plan should be designed to support you for many years after your actual retirement date.
Pay your taxes.
You have not yet paid taxes on the funds in your 401(k) — unless you have a Roth 401(k). So if you have a $1 million account balance in your 401(k), that does not make you a millionaire. The value of your plan assets is actually anywhere from around one-fifth to one-third less than it appears due to taxes. Uncle Sam owns a big part of your plan assets and will take his share when you begin to withdraw from the plan.
Consider pitching your plan for better options.
When you review the investment options within your plan, pay attention to a couple of things. Are the costs reasonable? Review the funds and options available and compare it with peers within the same asset class. If the funds seem particularly expensive, consider raising this with human resources or the plan administrator. Are there ample asset classes? If not, consider raising this issue, too.
Consider an HSA.
A health savings account allows people with high-deductible health care plans to save and invest funds to be used for medical expenses tax free. Unlike a flexible spending account, the balance rolls over from year to year and can potentially be invested for your long-term needs. You can even consider more sophisticated strategies to truly make your HSA plan a part of your retirement portfolio. This could include paying for out-of-pocket medical expenses, and allowing your HSA to continue to grow tax free. Then, in retirement, you use all the receipts you have saved from your out-of-pocket expenses to make tax-free withdrawals to pay for those costs.
Don’t withdraw from your plan.
It is possible to borrow from your 401(k) in certain circumstances, but that doesn’t make it a good idea. Though it may seem like you have the money to use, a 401(k) loan is literally borrowing from your future financial well-being, and in most cases, stems from not understanding when to invest (long-term goals) versus when to save (short-term goals of five years and under). To add insult to injury, you are taxed twice on 401(k) loans. You pay a tax penalty to withdraw the money, and you pay back the loan with money that you have already paid taxes on.
Here’s how to maximize your retirement benefits.
Review these 10 ways to make your retirement account work better for you:
— Participate.
— Don’t give up free money.
— Maximize in a sensible way.
— Increase each year.
— Rebalance regularly, but not too often.
— Don’t obsess about your daily balance.
— Pay your taxes.
— Consider pitching your plan for better options.
— Consider an HSA.
— Don’t withdraw from your plan.
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10 Ways to Maximize Your Retirement Investments originally appeared on usnews.com
