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Posted by Tiffany Gaskin

How to Successfully Manage Your 401(K)

How to Successfully Manage Your 401(K)

The 401(K) plan is what most Americans use to gather money. The form comes with a quarterly account statement. However, to successfully manage your 401(K), you must understand the investment types that suit your status and how to manage the account using workable strategies.


Contribute at least 15%

Generally, professionals advise that you contribute 15% of your earnings to your 401(K) plan annually. However, to be safe, you can add up to 20% if it won't cause a shortage in your finances. The contribution contains donations made by your employer or company. For example, if your employer donates 3% to the account, you'll donate 12% to round up to 15%. 

You can also increase the contribution anytime you get a raise. For example, you can add 1% to your usual 401(k) contribution if you get a 3% raise. The method is painless and suitable for saving while going on with your take-home pay.


Make Roth 401(k) contributions

Roth 401(k) contributions do not attract taxes after retirement if your account has lasted more than 5 years. Add some portion to your Roth 401(K) contributions as savings. If you start saving early, you'll make a higher return by retirement. Those in their 20s and 30s can make all 401(k) contributions to their Roth 401(k) account. Imagine you have a tax-free balance at the end of 30 to 40 years.

Suppose you're in your 40s, 50s, or 60s; you should read tax considerations to know the benefits of remitting to a Roth 401(k) account. Ensure you check if you'll be earning lower or higher when you retire, or you can check if you belong in the bracket of taxpayers that enjoy 100% income replacement. In a lower tax rate era, it is better to have your donation taxed before retirement, which may be at a higher rate. So, it is advisable to make Roth 401(k) contributions rather than pre-tax 401(k) contributions.

Don't stop contributing

Some reasons may hinder you from contributing to the 401(k) accounts, such as market fall or low returns. However, the idea of contributing to the account is to buy low and sell high, which means the account acquires more investment when the market is low and sells when the prices rise. 

Some people stop or reduce the 401(k) contributions when they start saving for another want like a house, college fees, vacation, a boat, etc. However, there are no good reasons to lower your contribution rate.

But some hardships may permit you to stop or reduce your 401(K) contributions, such as when your partner loses their job. In addition, the issue of lowering contributions to 401(k) may further stop the contributions when life gets together.


Don't cash out early

Most employees may participate in many jobs before retirement. Such people are to decide what to do with their balance from their previous jobs. This opportunity makes it tempting to spend the money but making withdrawals from your 401(k) before the age of 59 ½ will attract a 10% penalty and taxes on the withdrawn amount. 

In addition, you may miss out on many opportunities like compound interest. The savings are for retirement and should be left for that.

Diversify your assets

Sometimes 401(k) may face a fall in investment, but you can mitigate the risk by adding stock or bond funds. However, be sure these new options have high-risk tolerance that can periodically rebalance your account to reach your target amount. 

Also, avoid making significant changes to your 401(k) investment anytime there is a market shift or news that could influence the market. Making changes on a whim will eventually lead to the collapse of investment or leave your contributions volatile to losses. 



Tiffany Gaskin
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