6 Mistakes In Your 401K You Should Never Make
We at Advanced Wealth offer a unique approach to women and money, in particular to their 401K and retirement plans. But just because you have a 401K doesn’t mean you’re doing the most you can to ensure an early and bountiful future. There are many mistakes to be made, and we have gathered 6 that we feel you should avoid.
1. Not Having a 401K
This is obviously a no-brainer, as anyone who can afford a 401K should have one, even if they only contribute $100 per month. Careful and conservative 401K accounts can result in big payoffs during your retirement years, which is useful since there is a weariness on Social Security, depending on who you ask. For example, CBS News believes Social Security will always be around, while The Heritage Foundation has this shocking graph showing the deficits Social Security is currently running with predictions for it to quadruple in the next 20 years.
2. Not Contributing to the 401K
You may have a 401K offered by your work or even one you chose yourself with the help of a financial advisor, however, this doesn’t mean you are taking full advantage of it. For example, did you know that individuals under the age of 50 can contribute up to $17,500 per year in 2014 and receive a break on their taxes? The amount rises to $23,000 if you are over 50. The takeaway here is: the more money you save, the less you pay in taxes and more you will have later on.
3. Not Contributing Enough to the 401K
So what is the correct percentage one should be investing in their 401K? To answer honestly, at least 3% of your income should go into your 401K. However, when taking the maximum contribution amount of $17,500, those who make $590,000 per year or more are the only ones who will hit the max mark at this percentage. Others need to find creative ways to add the funds to their 401K which can include the below.
4. Not Utilizing Employer Contributions to 401K
Many employers will gladly contribute a certain percentage to their employees’ 401K, which is great. There are even those who will match contributions that employees make. So if you put $1,000 in your account each month, your employer would match that, giving you a total of $24,000 per year in 401K contributions. While each employer is different, the average contribution rate is about 5%, which employees should take full advantage of.
5. Treating a 401K Like a Traditional Savings Account
If you have a savings account in a bank, you may contribute and withdraw as you see fit. However, a 401K is not to be treated the same way. Below are some of the costs associated with early, unapproved withdrawals from your 401K:
• Loans against a 401K often need to be paid back in 60 days with loans paid after this date carrying a 10% penalty, as well as the cost of paying taxes on the income.
• Early withdrawal from a 401K can force an employer to hold 20% of the total account in order to repay the IRS.
• Early withdrawal from a 401K can come with a 10% early withdrawal penalty.
6. Paying Too Many Fees for a 401K
Just about all managed financial accounts come with some type of fee, and a 401K is no different. However, not all are created equally and many can come with obvious and hidden fees such as:
• In house or proprietary products, or when employers put their own mutual fund into 401K plans.
• Wrap fees usually found in a 401K with annuities.
• Revenue sharing, or when your employer shares part of your 401K earnings with a third party.
• Other miscellaneous fees, such as record keeping, all of which can eat away at your retirement.
This is why it is essential to have an impartial financial advisor revise your retirement accounts to see if you are doing any of the above, if your employer is over-charging for your 401K, and what you can do about it.
If you are looking to build a prosperous 401K and need a Houston financial advisor, give us a call at 800-348-4221 or contact us today for a complimentary consultation.