Now's the time when you're likely tidying up the garage, paring down your closet and dusting off the attic shelves. While you're at it, don't forget to clean up one of your most important assets -- your workplace 401(k) plan. Throw away the notion of "set it and forget it," and take a few moments this spring to get your financial house in order. Here are a few tips to get your 401(k) in tip-top shape:
1) Put old 401(k)s in their proper place. If you're like many Americans, you might have money in a 401(k) from a previous job. There are a few options available for dealing with old 401(k)s, and what's best will depend on your unique situation.
- The first option is to leave the money in the old plan. It may continue to grow in line with how you have it invested, but you'll no longer be contributing to it and you might also pay less attention to things like asset allocation, which should be adjusted over time.
- Second, you can roll over your vested balance from an old plan into an individual retirement account (IRA), which allows you to keep retirement assets invested in a tax deferred account. This option -- chosen by 40 percent of workers, according to the Employee Benefits Research Institute (EBRI)* -- has some distinct advantages. An IRA generally offers greater investment flexibility than a 401(k), which is usually limited to a core lineup of investment choices selected by your former employer, and it can provide greater flexibility when you're ready to start receiving retirement income. However, there may be fees for opening and maintaining an IRA.
- Third, you can transfer your old 401(k) assets into your current workplace plan. About 24 percent of workers go this route, according to EBRI. Some of the advantages include the ability to avoid certain taxes and potential penalties associated with a distribution, and the simplicity of having your retirement savings consolidated into one account. With a 401(k) rather than an IRA, you could also have greater access to lower priced investments that are more commonly available to investors in larger workplace retirement plans than to individuals.
- Your last option is to take a cash distribution, but I don't recommend it because there are significant downsides, including possible hefty tax penalties. Also, once money is out of a retirement plan, you're missing out on the potential benefit of compounding that's inherent in tax-deferred savings plans. Remember, this money is for your retirement.
Prior to making a decision, be sure to consider factors such as fees, available investment options, distribution options, legal and creditor protections, the availability of loan provisions, tax treatment, and other concerns specific to your individual circumstances.
2) Restore balance. Over time, swings in the markets may leave your 401(k) asset allocation out of whack. For example, last year's market spikes may have skewed your allocations as stocks likely outperformed bonds and other kinds of investments in your portfolio. This is a great time to check that you've still got the right mix of asset classes to give you the balance of growth and risk tolerance appropriate to your situation. Some plans offer tools that will automatically rebalance your account. If advice is available as part of your plan, a financial professional can help you understand what makes the most sense for you.
3) New season, new beneficiaries. Spring is all about new beginnings. If you've recently experienced a major life change, such as the birth of a child, a marriage, or a divorce, take a moment to review and adjust your 401(k) plan's beneficiary designations to ensure they're in line with your current situation. If you're married, your spouse automatically gets the money unless he or she waives that legal right.
4) Brush up on fees. Thanks to government regulations introduced a couple of years ago, all 401(k) participants receive a statement outlining the fees associated with the funds in their plan. While you're cleaning up your 401(k) act, review your investment options and look for those with lower operating expenses. Many plans now offer index funds, which are often less expensive than actively-managed funds.
5) Spruce up your contributions. While I always advise that 401(k) participants contribute at least enough to take full advantage of any employer match, I would also suggest increasing your contribution level to get as close to the federal maximum as your financial situation allows. By law, you can sock away up to $17,500 in your 401(k) per year, or more in catch-up contributions if you're approaching retirement age. If you've recently gotten a raise, or if you can cut back on expenses in another area of your life, consider upping your contribution percentage to get closer to that max amount. Thanks to the power of compounding, a few thousand dollars now might translate into tens of thousands of additional dollars in retirement.
I hope you're feeling inspired to shake the cobwebs of your 401(k) plan. By taking a few proactive steps this season, you could be on a clearer path to a comfortable retirement.
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