401Ks are the most popular investment type in the US, but many Americans don’t know how they work. In fact, a survey conducted by OnePoll on behalf of Beyond Finance found that 43% of participants weren’t clear about what a 401K retirement plan is. Here we’ll demystify 401Ks and tell you six things that you need to know. Your future retirement depends on it.
1. You Need to Roll Over Your 401K
Sometimes, people forget to roll over their 401K when they change jobs. Sometimes if this money is less than $7,000 your account balance may be sent to you as a taxable distribution. Check your accounts and explore your options. You may be able to keep the money in your former employer’s plan or you may be required to roll it over to your new plan.
2. You May Be Paying Fees
Did you know that 401Ks often come with administrative and investment fees? These fees are often called an expense ratio and are calculated by dividing a fund’s operating expenses by the average value of its net assets. A high expense ratio will eat away at your returns. This is different from a management fee or assets under management fee. This fee is what an investment advisor will charge for managing your individual portfolio. Check your account to make sure that you aren’t overpaying for these services.
3. Target-Date Fund Might Not Be Best
Default investments like target-date funds may not suit your risk tolerance or overall investment goals. TDF asset allocation gradually shifts to more conservative investment choices, reducing the risk of losses as the target date approaches. Riskier investments are usually invested in only in the earlier years. This approach may limit how much your money will grow as you approach retirement.
4. Employer Match Can Change
Just because you have an employer match right now doesn’t mean that it will always be that way. Employers can stop matching your contributions at any time. So, you should max out your contributions if your employer is offering a match. This way, you’ll get the most free money possible added to your 401K.
5. Taking Out a Loan or Withdrawing Will Hurt You
If you withdraw money early or take a loan out against your 401K, you’ll have to pay a penalty and taxes. Plus, you’ll miss out on any market gains while the money isn’t invested. When taking out a loan, any unpaid amounts become a plan distribution to you. Your plan may even require you to repay the loan in full if you leave your job.
6. Required Minimum Distributions Aren’t Optional
Most plans require you to withdraw funds at 73. Plan accordingly to manage your taxes. In a traditional 401K, taxes are deferred until you withdraw. In a Roth 401K, you are taxed on the money you invest, so you won’t have to worry about paying taxes when you withdraw your money.
What questions do you have about 401Ks? Let us know in the comments.
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Teri Monroe started her career in communications working for local government and nonprofits. Today, she is a freelance finance and lifestyle writer and small business owner. In her spare time, she loves golfing with her husband, taking her dog Milo on long walks, and playing pickleball with friends.
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