A: A 401K is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.
A 401K plan is a type of retirement plan that your employer can legally offer to employees. The plan allows both the employee and employer to get a tax deduction when they put money into the employee’s 401K retirement account.
In order to ensure you’re getting the most out of your 401K, make sure that you aren’t falling into the following mishaps:
Not Investing Enough. Many plans offer some type of match for your contributions. Doesn’t matter if it is 100% or 50% up to a set limit, the employee contribution should be at that limit. It is referred to as “free money” for a reason – it is basically being given as an incentive to save!
Tapping in Too Early. You can take a penalty-free withdrawal from your 401K at age 59 ½, and investors sometimes see this as a green light to start utilizing those funds. For most people that age, retirement is still a few years away, and they’d be better served leaving the cash in a tax-favored account to continue growing until they hang up their work clothes.
Cashing Out. Even if your 401K hasn’t added up to much before you leave your job, resist the urge to drain it when you leave, which will cost you a boatload in taxes and fees. Rolling the money into an IRO allows you to control your investments without paying any taxes or penalties on it, and the money can continue to grow until you retire.
Borrowing Against It. It can be tempting to take advantage of the option many 401K plans offer, to borrow a certain amount of money at below-market rates. Proceed with cautions. While you’re paying back the loan, you’re missing out on any gains you could have earned with that money. Plus, if you lose your job or choose to leave, most plans require you to immediately pay back any outstanding loans or pay a penalty.
Making the Wrong Investments. Asset allocation is very important inside a 401K, and having the wrong one can limit your ability to grow your nest egg. Many companies provide access to online advice to assist you in making your allocation work or you in the way you want it to.