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4 ways to maximize your 401k

July 12, 2022 by Louisiana FCU

tips for managing your 401k

Don't retire poor! Use these strategies to maximize your 401k.

A 401(k) program is a company-sponsored retirement plan that puts the responsibility of saving for retirement squarely on your shoulders. Unlike pension funds (where the company pays retired employees each month), it's up to you to make contributions to your tax-deferred 401(k) account, where it will then be invested in stocks, mutual funds and other instruments. Once you retire, you can start taking money out of the account to pay for living expenses.

If you have a 401(k), don't just contribute and forget about it. Get engaged and maximize your profit with these four strategies.

  1. Max out employer match

About 31% of American workers with access to a 401(k) don’t use it at all. With that level of participation, it’s a small wonder that Americans are worried about retirement. Beyond missing out on the savings, employees are also missing out on matching funds programs.

Think of matching funds programs as interest payments. Your company is willing to pay 100% interest on your 401(k) deposits. Even if you have expensive credit card debt, it’s unlikely anyone is charging you 100% interest. Increasing your 401(k) contributions at least to the maximum match level will help minimize the impact of slow growth within your portfolio.

  1. Watch the fees

One of the biggest differences between successful 401(k) investors and those who keep working long into their retirement is the fees that each pays on their investments. By law, companies must disclose the fees they charge for investment management. You can get a breakdown from your HR representative.

Once you see the fees you’re paying, it’s time to gauge if they’re reasonable. For comparison, most small companies have fees around 1.4%, medium-sized companies have fees around 0.8% and large companies have fees around 0.5%. If you’re paying more than that, it might be time to switch the funds you’re using.

  1. Revisit the Roth question

Most of the time, a Roth 401(k) makes the most sense for young people. Taxes are likely to be higher in the future, so paying them now results in a savings in the long run. With returns expected to drop and savings amounts likely to be a larger determinant of total wealth accumulation, it might be time to revisit conventional wisdom.

If taking a tax deduction now in the form of a traditional 401(k) contribution would enable you to save more, it might be worthwhile. You can find other ways to manage taxes once you’ve saved enough for retirement. In the meantime, growing your nest egg may be the most important step.

  1. Consider IRAs

An Individual Retirement Account (IRA) can hold savings certificate funds. These instruments offer a predictable rate of return that is not dependent on those macroeconomic forces. As a hedge against market slowdowns, adding certificate accounts to your portfolio can be an excellent step toward minimizing risk.

Despite the changing economic winds, the principles of smart retirement planning remain the same. Spend less than you earn. Avoid debt. Invest as much as you can, as often as you can and as cheaply as you can. With a little luck and a lot of hard work, you can enjoy a safe, prosperous retirement.