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Written by Dan Mules, CPA

7 Ways to Get the Most Out of Your 401(k)According to Northwestern Mutual’s 2018 Planning and Progress Study, almost 8 out of 10 Americans say they’re concerned about not having enough money for retirement. The good news is that it is never too late (or too early) to start contributing to your retirement nest egg. There are a lucky few who can lay claim to a pension, however for most this is not the case. This is why a 401(k) is an extremely valuable retirement planning tool. Rising medical costs, inflation, taxes, and the desire to realize our long-term goals are hard truths to face. Nonetheless, they are here to stay for the retiree and the 401(k) does a great job of providing a salient solution. Here are seven ways to get the most out of your 401(k).

Consider the Location of Your Assets

401(k) plans provide major advantages. Contributions and investment gains are not taxable until the money is withdrawn. Contributions are also tax-deductible, which lowers your taxable income in the year you make it. Also, any investment gains are tax-deferred, which means that money gets reinvested back into your portfolio. Part of maximizing a 401(k) is capitalizing on the tax deferral benefits it offers. Asset location is when you place tax-inefficient investments such as actively managed mutual funds or high-yielding bonds and real estate investment trusts (REITs) in a vehicle where the gains won’t be taxed, like a 401(k). By doing this, you can avoid the income tax imposed on the interest and earnings of your investments.

Take Advantage of a Wider Selection of Investments

Sometimes you may find you don’t like the investment choices available to you within your 401(k). Some plans allow in-service distributions, which is a tax-free withdrawal that goes directly to an Individual Retirement Account (IRA). The IRA will have a larger selection of mutual funds or stocks to choose from. However, keep in mind that 401(k)s allow for hardship withdrawals or other one-time expenses under age 59 ½ for specific reasons, and IRAs do not. Your plan’s summary document or fund administrator can determine if this is available to you.

Automate Contributions & Increase Them Every Year

Automation is powerful. It doesn’t give you the chance to make a choice as to whether you should make a contribution or not. A recurring deduction can be taken from your paycheck, so it truly becomes a “set and forget” task. Most recommend contributing between 10-15% of your salary toward your retirement account every year. Even if you can’t contribute that much, start smaller and work your way upward. Try to take advantage of your company match if available. It is free money and will help get you closer to the 10-15% yearly savings goal! Increasing your contribution percentage each year is an excellent practice. Even just 1% more is worth it! Some plans allow you to automate this as well with an automatic escalation feature.

Redirect Funds Toward Contributions

Many employees receive bonuses or raises annually. Instead of spending this money, apply it to your automated retirement account contribution. Every little bit goes a long way when you look at it through a long-term lens. For those age 50 and older, there is a catch-up contribution opportunity to save an additional $6,000 in a 401(k) plan in 2019 for a total contribution of $25,000. No matter your age or situation, take advantage of any opportunity to sock away as much money as you can now!

Weigh the Benefits of a Roth 401(k)

A Roth 401(k) is different than that of a traditional 401(k) in that a Roth is funded with after-tax dollars, and qualified distributions are not taxed in retirement. For those who may end up in a higher tax bracket come retirement or higher income earners in general, a Roth 401(k) can be a good choice. You don’t have to do one or the other. You can make contributions to a Roth, as well as traditional pre-tax contributions up to $19,000 for 2019. That’s $500 more than in 2018! To illustrate, a worker who is in the 24% tax bracket and saves this amount could reduce his tax bill by $4,560.

Know What You Are Invested In & Limit Fees

Knowledge is power. Understanding what you are invested in gives you the upper hand and allows you transparency regarding fees taken from your mutual funds daily. The more fees, the less money you have flowing into your retirement account. Some funds have higher fees than others, and those fees can have a huge impact over time. NerdWallet found that “paying just 1% in fees could cost a millennial over half a million dollars over 40 years.” FeeX is a tool that can help you analyze your account and may be able to provide similar, less expensive options. Oftentimes, you can find a similar fund with lower fees if you are willing to do your homework. A good rule of thumb is to keep mutual fund fees below 1%.

Make Sure Your Account Is Being Monitored Regularly & Rebalanced as Needed

Rebalancing is a crucial element to investing. Market fluctuations can throw your allocation out of whack. Essentially, rebalancing is buying and selling stocks, funds or other investments to maintain your desired asset allocation. For example, if your current and desired asset allocation is 60% stocks and 40% bonds, and stock prices rise for a couple of months, your stock allocation may rise to 75%. That means you will have to sell some stocks and possibly put that money in cash or bonds in order to get back to your desired allocation mix.


Source: Motley Fool / CNBC / Forbes

© Geier Asset Management, Inc. April 2019. Dan Mules, CPA is a Client Manager and Tax Planning Professional for Geier Asset Management, Inc., a Registered Investment Advisor. The articles & opinions expressed in this material were gathered from a variety of sources, but are reviewed by Geier Asset Management, Inc. prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of April 2019 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual circumstances. In all cases, please contact your investment professional before making any investment choices. Geier Asset Management, Inc. is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.