Carrying on from beginner’s guide to starting a 401(k) (Part 1), we left off with the common mistakes that are made, all of which are listed below:
- Not taking advantage
- Not altering your default investment choice
- Overlooking rebalance
- Forgetting to roll over
- Investing too much employer stock
Not Taking Advantage
If you do not take advantage of your employer’s match, then you will really be missing out. This step in the beginner’s guide to starting a 401(k) is essential and really lets you face the benefits. Many people do not take advantage of this, due to the worry of having to begin investing. You may be in the situation that you think there is not enough money that you can invest; however, this is another story. Even if you discover a small account to cut with your budget for investing and at the same time, your employer is contributing, this will surely make a difference.
Not Altering Your Default Investment Choice
You are always given a default investment choice when you open a 401 (k). A further default option may be money market fund. What this means is either no or very little growth.
It is important that you check your investments every now and then just to see if they need rebalancing.
Forgetting to Roll Over
You must not forget to take your money with you in the case you leave your job. No matter how obvious it may sound, many people forget to take their 401 (k) account once they move on from their job. Signing up for a new retirement account or opening one at your new job gives you the option of funding the account via rollover. In order to avoid penalties and taxes, it is important that you request a direct rollover. Alternatively, if your current 401 (k) plan comes with many investment options from your employer, then maybe leaving it where it is will be a better idea. However, if you do choose to do this, it is important that you find out about any administrative fees. When compared to IRAs, a 401 (k) plan gives better creditor protection in some states. This is another reason to why you may want to keep your funds exactly where they are.
Investing Too Much Employer Stock
In order to keep your 401 (k) account balanced, it is important that you limit your employer stock. The main problem many individuals have is investing a lot of their portfolio in their employer’s stock. In order to ensure that your portfolio is diversified, regardless of your employer’s help, you should limit investments in your company’s stock. A recommendation is to invest in broad stock, low-cost funds. Just to make it a little easier, financial experts suggest giving no more than ten percent of your portfolio to your boss’s stock.
What Else You Need To Know
If you are new to 401 (k), this beginner’s guide to starting a 401(k)is perfect for you. A couple of things that you need to watch out for include:
With the 401 (k), you can also take out a loan from your account. Before the retirement, you may also withdraw the money. However, this is something that the majorities of financial advisors hate and think of as a bad idea. Another thing that you may be interested to know is that you will also have to pay fees and interest.
Taking Out a 401(k) Loan
A further problem with borrowing from your 401 (k) account may result in doubling the tax yourself. This sounds ever so awful, but certainly does happen and ends up taxing some money more than once. Loan repayments are not taken out of your paycheck on a pre-tax; however, 401 (k) offerings are.
The fees that are related to the 401 (k) accounts are an important part of beginner’s guide to starting a 401(k) and need to be considered. When it comes to calculating and comparing, you can do this very easily using an online calculator. Each fund will have its own fee amount, which is why it is important that you check with your employer. Once you have carried out the calculation’s, you will have more of an idea, which will help you decide whether this fund is for you or not. If you are not completely satisfied, then the beginner’s guide to starting a 401(k) suggests you look into a different fund.
When you are a beginner in this process, it can seem very difficult. However, that is why both parts of the beginner’s guide to starting a 401(k) are for you, so you are not stuck during the process. After you have read the beginner’s guide to starting a 401(k) and fully understood the basics, you will feel more confident knowing exactly what to look for, which will make it feel less intimidating.