Planning for retirement is not easy, to help get some good tips, we reached out to Tom Donahue, an expert financial writer with Nerd Wallet and Payday Loans Online Lender to get some tips for saving money and achieving your financial goals. Most people take advantage of their companies 401(k) plans, yet most people make very common mistakes when it comes to these 401(k) plans. Did you know that 401(k) plans can be fraught with pitfalls to avoid such as high fees, default and poor investments, and poor planning all of which can directly impact the overall benefit of these plans? Here are come catch 22’s to avoid when it comes to 401(k) plans.
Cashing Out Your 401(k) After Changing Jobs:
This is a common mistake people make after changing employment. If you cash out your 401(k) plan you will be hit with taxes and early withdrawal fees that seldom make cashing out worth it. This is your retirement money not a personal piggy bank. The penalties and taxes you will face for an early withdrawal can be quite steep, for example if you are under age 55 and reside in the 25% tax bracket and you withdraw $10,000 from your 401(k) plan you can end up owing over $3000 in taxes and penalties. You can however completely avoid this loss of assets by simply leaving the money sit in the 401(k) plan or rolling it over to a new employers 401(k) plan. You could also opt to roll it over into an IRA or individual retirement account. Anything is better than cashing out your 401(k) plan early.
Employer Plan Waiting Periods:
Many employers have a period of time you must wait before you can join the work place 401(k) plan. Around 55% of employers allow you to join the company 401(k) plan right away upon being hired, with the remaining businesses requiring some period of time before you are eligible to join the plan. The wait period can be from two months to one year. Of the employers who offer a matching 401(k) plan only about 44% will match right away, with the remaining requiring a vetting period of 6 months to a year before the company will match your contribution. If you have a waiting period you should divert what you would have paid into a 401(k) plan into an IRA, this will get you a tax break all the while helping you to save for retirement. If you do not save during this time you are basically wasting this period of time when it comes to retirement planing.
Choosing The Default Investment:
For most people their 401(k) money is invested into whatever the employer chooses. Most often times this is a target-date mutual fund. These investments are often chosen taking into account needs of the employees, yet the level of risk and given fees tied to the investments might not sit well with you. You can always investigate where your money is being invested and check and see if you have any other options as to where your 401(k) money is being allocated to. If your company allows you to opt into a no-load mutual fund that may be the best route since these have no upfront costs or back-end charges associated with them, however you do need to pay attention to any internal expenses that the mutual fund incurs.
Changing Jobs Before Fully Vested:
If your employer matches your 401(k) contributions did you know that chances are your employer requires a certain amount of time for you to be fully “vested” into your 401(k) plan? Being fully vested means that you are entitled to the full benefits of the plan. Those who are not fully vested are only eligible for what they paid into the plan, meaning that if you quit your job or are fired from your job you will loose your employers contribution to your 401(k) plan. For many people the this can be quite a significant amount of money, so you will need to think hard before changing jobs if it is worth losing out on the portion of money your employer has pledged to your 401(k) plan. Most companies that require you to be vested in order to receive the full company contribution require you to have 5 to 6 years of company service before you are considered fully vested.