A 401(k) is a helpful retirement planning tool.
Does your employer provide a 401(k) for retirement planning?
If yes, you are quite fortunate.
Used correctly, a 401(k) can help set you up for a successful retirement.
According to a recent tucson.com article titled “More common 401(k) mistakes—and their consequences,” not everyone manages these tools wisely.
What should you avoid?
Investing without knowing your options.
Many 401(k) plans have options to contribute pre-tax or post-tax dollars.
Be sure you understand the pros and cons of each.
It is often advisable to lower your W-2 earnings through contributing pre-tax dollars to your 401(k) or traditional IRA.
Cashing out your 401(k).
What happens if you change jobs?
Do you simply take the money in cash when you leave?
Most people do not know this is a bad idea.
When you make withdrawals, this money becomes taxable income.
In fact, certain retirement distribution choices trigger tax liabilities and penalties.
What can you do instead?
You should either leave it within the 401(k) plan of your old employer, move it to a plan of a new employer, or set up a rollover IRA with a firm that will handle the transfer of your IRA.
Borrowing from your plan.
Many 401(k) plans have a loan feature.
This may seem appealing.
It is also expensive and has strict rules regarding paying back the loan.
Read and understand the fine print.
Without doing so, you could compromise your future.
Defaulting on a 401(k) loan.
401(k) loans have specific rules.
Most have to be paid back within five years, unless the loan is for purchasing a primary residence.
You should know what happens to the loan if you move or change jobs.
Also, check the extent of tax penalties for the early withdrawals.
Most importantly, do not delay saving for retirement.
Start putting money aside into your retirement savings when you begin working.
If your employer has a match, take full advantage of it.
Use your 401(k) to prepare for your retirement years.
It is not a “piggy bank” for you to play with now without regard for your future.
Reference: tucson.com (Nov. 15, 2019) “More common 401(k) mistakes—and their consequences”