Mistakes You Could Make With Your 401k

Your 401K plan is not a sure-fire way towards a comfortable retirement; it is simply

a tool that can help you make good money to add to your nest egg; that is, if you do not make mistakes. These accounts are much like the tools you find around the house. Whether you use them correctly and productively or the other way around is up to you. Here are some 401K misconceptions you should avoid:

Just because you contribute to your 401K does not mean that you can spend a lot prior to retirement (or even after quitting your day job). Many people think this way today, surprisingly, despite the wealth of advisories and other information that they have easy access to. If you participate in your 401K regularly and maximize your contributions, you will boost your chances at retirement security if you do not live beyond your means.

You cannot put a strategy in place and forget about it. While it is easy to save money with automatic deposits, the set-and-forget strategy can cause you a lot of grief. Even a 401K that features automatic portfolio rebalancing requires that you change how your asses are allocated as the markets and your needs change. Start managing your own 401K assets with the help of more experienced colleagues, the aid of your administrator, or the advice of paid professionals.

You should not toss aside other potential investments. If you want to be financially comfortable in retirement, savings accounts, Roth IRAs, traditional IRAs, and other accounts can help you reach that goal. The tax benefits of a 401K plan should not turn it into the number one venue for your cash. Research on the different types of alternative accounts and investments, to find which ones are best for you and your needs.

Realize that the 401K was designed for retirees. Many seniors know this, but some life changes (such as job loss) can tempt people into withdrawing that lump sum for whatever reasons. This drops your balance to zero, of course, which does not make early withdrawals a viable option for the cash-strapped pre-retiree. Sure, you may need the money now, but you are not going to get as many chances at getting another job and getting back on your feet as you grow older.

You need to make the most out of any tax breaks that come with retirement savings plans, and not just 401Ks. There are not that many investors with the foresight of using their overall investment portfolio to the maximum and saving every bit of money they can. The assets in a retirement account grow without the burden of taxes - think about reshuffling your portfolio by placing some taxable investments in retirement accounts and putting tax-advantaged ones in taxable accounts. This helps you avoid missed opportunities at making or saving money and other mistakes you can make with your 401K.

by: Katherine Smith

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