Five Ways To Get The Most Out of Your 401K

As a financial advisor people often ask me, “How can I get the most out of my 401(k) before I retire?” The answer: try to minimize taxes while maximizing your returns. But how? Here are some suggestions:

1: Make sure you are taking advantage of any employer-matching.

This is where an employer contributes the same amount to your 401(k) that you do, at least up to a certain point. This is essentially free money on the table, so make sure you’re contributing enough to qualify.

2: Have a certified tax professional examine your 401(k) holdings to determine if they can be made more tax efficient.

In many cases, certain funds in your 401(k) can cost more in taxes than they’re worth. While I do not provide tax advice, I can certainly put you in touch with a good tax professional.

3: Determine whether the investments in your 401(k) are in line with your overall goals.

Sometimes people find their 401(k) contains companies that are either too risky or too conservative … but how could you know that if you don’t look at your 401(k)? That’s why it’s smart to periodically review your investments to make sure everything is in order. Think of it like checking the tire pressure on your car.Of course, if you have any questions about the specific companies in your 401(k), and whether they may be too risky or too conservative, please contact me. I would be happy to answer any questions you have.

4: Review your 401(k) regularly to determine if it needs to be rebalanced.

Rebalancing means “periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation,”1 That’s a bit technical, so think of it like re-arranging the furniture in your living room. Occasionally things get out of order and you need to move the furniture to bring it back in line with how you originally wanted the room to look. Rebalancing your 401(k) is very similar, and it’s a great way to ensure your 401(k) remains invested how you want it to be. For example, let’s say you originally divided your account to invest 50% in stocks and 50% in bonds. (Note: this is purely hypothetical and not a recommendation.) Imagine that your stocks rose high in value. This could lead to a weighting of 70% in stocks! Rebalancing is returning to your original intent of 50/50 in both stocks and bonds.

If this sounds complicated, don’t worry. Rebalancing can be a bit tricky if you’ve never done it before. So if you’d like a complimentary second opinion on your 401(k) and how to rebalance it, please let me know. I’d be happy to help.

5: Avoid the temptation to withdraw money from your 401(k) before retirement.

As the saying goes, “Good things come to those who save!” In most cases, withdrawing early can lead to severe penalties. Let me know if you would like further information on the ins and outs of 401(k) withdrawals.

Your 401(k) is an essential part of saving for your retirement. Don’t neglect it! The good news is that by spending just a little extra time, you can get the most out of your 401(k) by making sure it’s well-balanced, tax efficient, and in line with your other financial goals. If you have any questions about the points raised in this letter, please contact me at 301-791-7910 or jeff@bowersinsurance.com. My door is always open.

Resource:

1 “Rebalancing,” Investopedia.com, accessed February 24, 2015. http://www.investopedia.com/terms/r/rebalancing.asp