5 Mistakes to Avoid with Your 401k
CNN ran a nifty story today on 5 mistakes to avoid with your 401k.
1. Not Participating
Get started today or as soon as you are eligible by contacting your benefits department.
2. Not Contributing Enough
As a rule of thumb, you should be contributing at least as much as your employer is offering a match.
3. Not Investing for Growth
For the most part, decent advice. However there should be some diversity in your investments. Plan administrators love tout the benefits of aggressive growth but often times the limited offerings within the plan make this a bad idea*. Look at the histories of funds available and make that part of your decision making.
4. Borrowing from your 401k
Again, plan administrators love to tout the ‘borrow against your 401k’ as part of their pitch because you are essentially paying yourself back with interest. Forget it. If you were to leave the company before the loan is repaid, the balance is due immediately otherwise you must delare it as a withdrawl and pay the taxes and penalties on the outstanding amount.
5. Cashing out your 401k
10% early withdrawl penalty and upwards of 40% in taxation depending on your tax bracket. Or better yet, look at it this way: if you were to cash out your 401k early, you can essentially kiss half of it goodbye.
*case in point, I was recently involved in the overhauling of a large company’s 401k program. The 3 aggressive growth funds they offered were dogs with poor return histories - even through the dotcom boom era - and lost more than their peers post-bubble burst. In addition, none have them have kept pace with the modest returns most aggressive growth funds have seen in the last 2 years. In the same plan, one conservative fund has seen 9% annual returns for the past 3 years.
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