10 ways to make your 401(k) balance grow faster
Boost your balance.
Used correctly, a 401(k) account allows you to take advantage of employer contributions, tax breaks and automatic saving. But you also need to take care to avoid excessive fees and penalties that will reduce your returns. Here's how to maximize the value of your 401(k) plan.
Having contributions automatically withheld from your paycheck gets money into your retirement accounts in the most efficient way possible, and you don't have to worry about forgetting to make contributions every month. There's little temptation to spend the money because it never hits your checking account.
Increase contributions over time.
You might start out saving a small portion of your paycheck because that's all you can afford early in your career. Remember to increase your contribution rate as you get raises and bonuses. Some 401(k) plans allow you to sign up for an automatic escalation feature that will boost your savings rate over time without further action required on your part.
Don't stick with the default savings rate.
Many new employees are automatically enrolled in the company 401(k) plan, typically at a default savings rate of 3 percent. But for most people this savings rate is too low to fund a financially secure retirement, and it might not let you get the maximum possible 401(k) match either. Pick a saving rate that will be enough to pay your bills in retirement, not the default rate your employer selects for you.
Make catch-up contributions.
One of the perks of getting older is being able to defer taxes on even more money in your 401(k) plan. Workers ages 49 and younger can contribute up to $18,000 to a 401(k) plan in 2015. Those ages 50 and older can additionally make catch-up contributions worth another $6,000 in 2015.
Get a 401(k) match.
A 401(k) match is likely to be the best possible return you can get on an investment. If your employer will give you 50 cents for each dollar you save, that's a 50 percent return on your investment. Workers who receive a dollar for every dollar they contribute can double their money.
Get other types of employer contributions.
Some employers provide nonmatching 401(k) contributions that might be based on a percentage of your pay or company profits. Nonmatching company 401(k) contributions may be provided in addition or as an alternative to a 401(k) match.
Traditional 401(k) accounts allow you to defer paying income tax on the money you deposit until you withdraw it from the account. You also won't have to pay taxes on the investment growth each year.
Some employers offer Roth 401(k) accounts. These contributions are made with after-tax dollars, but no income tax will be due on investment gains within the account each year, and withdrawals in retirement, including the investment earnings, will be tax free. Contributing to both a traditional and Roth 401(k) can add tax diversification to your portfolio.
Choose low-cost investments.
The expense ratio of the funds you choose is deducted from your retirement account balance, regardless of how the investment performs. Use your annual 401(k) fee disclosure statement to look up how much each investment option is costing you, and consider switching to funds with lower expense ratios.
Avoid fees and penalties.
There's a 10 percent early withdrawal penalty if you take out money from your 401(k) account before age 55, and a 50 percent tax penalty if you are retired and fail to take distributions from the account after age 70 ½. Take care to avoid withdrawing money from the account too early or too late.
Copyright 2015 U.S. News & World Report
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