In our last post, we discussed a few of the do’s of 401(k) plans, which includes starting early, taking advantage of your match, increasing contributions, check vesting schedules, and diversifying your investments. In today’s post, we’re going over the don’ts of 401(k) management.
Whether you’re still working, planning for retirement, or finally enjoying your retirement, your 401(k) is an incredibly beneficial tool that hopefully all of us use to make sure we are secure in our retirement. But when the 401(k) isn’t used efficiently, you could potentially be missing out on savings. At Savage Financial, you can work with a retirement planner who has a deep understanding of investments and how to use them effectively. If you’re transitioning into retirement, get in touch with our financial advisor today.
The Don’ts of 401(k) Plans
Don’t be Afraid of Growth
There are risks with any investment plan and your 401(k) is no different. With the constant fluctuating of U.S. and international stock markets, there will be some low days throughout the many years of the plan’s life. However, the 401(k) is about long-term growth, so the more money you can put into it when you are receiving a monthly income the better. If you do live 20, 30, 40 years past retirement, you want to do everything you can to make sure you have the funds to live the life you have grown accustomed to.
Don’t Treat it Like a Checking Account
Using your 401(k) as an asset when shopping for a mortgage is an option, but it should be the very last option. When you borrow against your 401(k) or pull funds from the account for any reason before the age of 59½, there will be penalties, and you will be taking funds from your future retired self. The only time you should withdraw money from your 401(k) is in an extreme emergency, and only if every other option has been exhausted.
Don’t Forget About Contributions
Many Americans are considerably behind on saving for retirement, and yes, that should create a sense of urgency for you. However, if you are behind, and especially if you are 50 years or older, there is good news. After the age of 50, the IRS allows what is called a catch-up contribution, in which people can contribute an additional $6,000 to their 401(k) plan above the $18,000 limit. Again, the more you can invest the better.
Don’t Ignore Your Eventual Taxes
A 401(k) is a tax-deferred account, which means that the money goes in without being taxed and when withdrawals are taken, that’s when the money is taxed as regular income. Depending on how much you withdrawal at a time, will determine how much tax you pay on that amount. According to the IRS, if you withdraw $1 million you’ll be paying 37% taxes on that amount. If you withdraw $100,000, you’ll be taxed 24%.
Don’t Forget Required Minimum Distributions (RMDs)
After the age of 70½, the IRS requires 401(k) holders to withdraw a certain amount from the account. The amount required is based on your age, account balances, and your marital status. If you want assistance determining your required minimum distributions, get in touch with a retirement planner for advice and guidance, or visit the RMD worksheet at the IRS.
If you want help with your retirement planning, contact a retirement planner at Savage Financial. Mike Savage has years of experience guiding people of all ages through their planning journey. Call us today in Pocono Summit.