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Tips on Taking Advantage of Your 401(k) Plan


The future of Social Security is being debated by both political parties with an uncertain outcome for future retirees, making it even more important that Americans do all that they can to secure their own retirement. Companies that offer 401(k) plans provide an easy way for employees to invest in their own future and the benefits can’t be overstated. An employee can start off by depositing a small portion of each paycheck and choose from multiple investment options. Some companies even match deposits -  essentially offering FREE MONEY.

Basics of 401(k) Investments

Although starting out small is a good way to begin, you you may need to increase your 401(k) investments to ensure you’re able to maintain your current lifestyle in retirement. To make it work to your advantage, your 401(k) investments need to be monitored. Diversification is the key to wise investment; too little diversity may put your investments at higher risk. Larger companies typically offer their employees options for various degrees of risk; while smaller business may not be in a position to provide many investment choices. But no matter where you work – large company or small business, if your employer offers the opportunity to get in on a 401(k) plan, do it.

How well your plan performs is largely dependent on the financial market. Desirable plans have funds that are varied in size: large cap, mid-cap and small cap. If your portfolio is comprised of too many similar funds, owned by the same company or considered high risk investments, you should consider several corrective strategies.

Become Educated
When it comes to managing a 401(k) plan, you are ultimately your own financial planner. The first step to improving the profitability of your plan is to speak to your personnel department. Ask your employer to evaluate whether the investments in your plan are appropriate, and if they can suggest educational resources to help you make these critical investment decisions. Read everything you can get your hands on, including blogs and investment journals. Watch U-Tube videos and cable television investment programs to learn more.

Study Your Portfolio
Begin by thoroughly reading every quarterly statement. Compare the fund performances to comparable ones on a rating website like Morningstar.com. Figure out what companies own your funds and check out the top rated mutual funds to help determine the companies you’d most want to include in your portfolio. Examine your options and find out how you can make changes to your plan for better performance and greater diversification.

Earn the Employee Match
Many employers commonly match their employee’s investment at $.50 for every dollar, up to 6% of income. This is free money, a fast and painless way to boost your 401(k) and should not go to waste.

Take Advantage of Tax Benefits
Traditional 401(k) plans allow you to defer paying income tax on the money you save. In 2012, $17,000 could be tax deferred if it was committed to a 401(k) plan; after age 50, the limit was $22,500. Since most employees end up in a lower tax bracket during retirement, paying taxes later in life can result in big savings.

Stick with It
According to the Bureau of Labor Statistics, Americans have, on average, fourteen jobs by the age of 40, but job longevity tends to lengthen as we age. Avoid the temptation of cashing in one account and starting fresh on the new job. Always transfer your investment. Keep in mind that cashing out will cost you a hefty withdrawal penalty and income tax on the withdrawal. Early withdrawals also cause you to miss out on valuable compound interest that is essential for building a large nest egg.

New government regulations now require more transparency in disclosing fees in your quarterly statements and will soon include easy-to-read tables for account holders to see the actual cost of the plan. Your employer is legally accountable to ensure that your plan serves your needs; regulations are also in place to eliminate unreasonably high fees. Brokerages and insurance companies that provide 401(k) plans must disclose the fees they charge to manage the accounts in the quarterly statements. By getting involved in your own 401(k), you can increase your potential for building a bigger retirement nest egg.

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