Question: What 401k tips must I know.. and what are the 401k withdrawal rules?
Answer: There are some basic 401k tips that you should keep in mind when you’re a considering how to manage (and maximize the return on) your new 401k investment account.
The 401k account is a great way to save for retirement. A 401k is an employer-established plan that allows each employee to put a pre-determined percentage of their earnings into a tax-deferred retirement savings account.
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"Eighty percent of success is showing up."
- Woody Allen |
There are specific 401k rules that are tax related: Taxes are not paid on the money in this account until it is withdrawn, which should be when the owner is at least at the minimum age 59.5. At this point or later when the money is eventually withdrawn, it is taxed like regular income.
Most employers match a percentage of the money that the employee contributes, making the balance grow at a faster rate. Therefore, the best 401k advice we can give is – Participate in the plan if it is available!
Some plans allow employees to make their own choices about what investments to make with the money in their plan. Other 401k programs are directed solely by the employer.
If you have choices about how your funds are managed, learn these 401k tips for investing. It’s best to stay away from investing largely in single stocks. The risk is very high, especially in a struggling economy. Many who work for publically traded companies put too much of their money into the company stock – this is not wise. Diversifying your portfolio is almost always a smarter strategy.
Event during the 1980’s and as recently at 2008 have shown us that even well established and highly recognized firms can be very quickly devastated. The old adage that says not to put all your eggs in one basket applies here as well. Invest instead in a mix of diverse mutual funds, stocks and bonds if the choice is offered.
The most basic 401k tips are in regards to 401k withdrawal rules and borrowing from 401k balances. The short version to either choice is: “Don’t do it!”
Don’t make early withdrawals from your 401k and do not take loans against your 401k account – period!
If you make an early withdrawal from your 401k account, you will have to immediately pay taxes on the amount you take out. In addition, you will pay the IRS a hefty 10% early withdrawal fee, at a minimum.
Basically, you will lose around 40% of the amount you withdraw to taxes and fees before you ever see a dime. This is far too high a price to pay in order to employ a withdrawal option.
In addition, taking a loan against the balance of your 401k is, likewise, a poor plan. Some plans allow employees to take up a loan out against the balance of their plan, up to possibly 50% of the current balance. However, no one makes a point of emphasizing to the employee that if she does this, it carries a great risk.
For instance if the employee loses her job she must pay back the loan within 90 days or face heavy penalties. Most people know better than ever these days that no job is 100% secure. If this happened to you unexpectedly, you wouldn’t want to add to that stress, the additional strain of paying back a large loan or losing a large chunk of your savings at a time when you aren’t employed would you?
So please take these basic 401k tips to heart when you begin to manage your account. Also, take advantage of our free guide 66 Ways to Save Money for proven ideas to increase your available cash flow.
Beginning with a 401k plan is a wise way to start saving for your retirement. However, the money you invest should be left there to grow. You must wait until retirement to use those funds.
So sit back and enjoy watching your balance grow, both as a result of your employer match, as well as the beautiful power of compounding interest!
"The greatest gifts you can give your children
are the roots of responsibility
and the wings of independence.”
- Denis Waitley |
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Debt is NOT your friend. It's not a wonderful "tool" for building wealth. That's a myth.
