A 401(k) is one of the most common retirement savings vehicles. Employers often offer them as a perk to entice willing employees to work for them. Although they are somewhat familiar, they can also be highly confusing. New employees want to be sure that they fully understand what a 401(k) entails before making a final decision on how much of their income to contribute. These are some of the biggest mistakes that employees should avoid making when dealing with their own 401(k):
- Failing To Fully Invest Contributions
- Taking Early Withdrawal Penalties
- Not Taking Advantage Of Employer Contributions
Failing To Fully Invest Contributions
Just making contributions to a 401(k) is not enough. Once the money is in the 401(k), you must select investments for that money to go in. Some companies offer free financial advisory services to their employees. These financial advisors will be able to pick investments for you based on a variety of things such as your estimated retirement date and your risk tolerance when investing. For those who don’t have access to a financial advisor and have to select their investments personally, index funds that spread your risk out over many securities are always a safe bet.
Taking Early Withdrawal Penalties
At times, employees become overzealous and contribute too much money to the 401(k) up front and find themselves needing access to this money before the account allows for free withdrawals. What employees need to know is that any unqualified withdrawal from a 401(k) account before the age of fifty-nine and a half come with a ten percent tax penalty. This can potentially eat into the returns that the investments have made over time and defeat the purpose of using the retirement account.
Not Taking Advantage Of Employer Contributions
Some employers will even go one step further than merely offering a 401(k) plan. Employers can at times provide a 401(k) match. This often comes as either a full dollar for dollar match up to a certain percentage of the employee’s income or as a partial match such as one dollar for every three dollars contributed. Failing to take advantage of employee contributions fully is just like leaving free money on the table.