If you work at a company that provides a 401K retirement plan, then you are among 58 million Americans who save for their own retirement with a self-directed plan. 401K plans hold about $6 Trillion in savings, or 20% of the $30 Trillion in retirement savings.
The 401K plan is a contribution plan, with savings deducted directly, pre-tax (meaning your investment in the plan is taken before taxes) and the returns are tax deferred (meaning you don’t pay taxes on your earnings until you withdraw – when you are over 65 years of age).
Nearly 15% of US employers offer a 401K plan and nearly 79% of all employees have an opportunity to contribute to their plan. Of those who have access to a plan only 41% of people do end up contributing to their plan.
If you do contribute to your 401K plan, what is the best way to maximize the savings and grow your retirement account?
There are 5 things to consider:
- Maximize your contribution. If you can contribute the maximum amount in a given year, ($19,500) then you should. That amounts to about $1625 per month.
- Pick a good mix of funds that allow for diversity and growth. Most 401K plans offer limited choices for investment – mostly mutual funds which invest in stocks, bonds and cash instruments. Pick a good mix – typically 65%-70% in stocks, 20%-25% in bonds and rest in cash – is good for those who are between 25-45 years of age. As you grow older, you might get more conservative and reduce your stock exposure to 50% or less.
- Do not borrow against your 401K under any circumstance. Most 401K plans allow you to borrow money against your contributions, but you will end up paying a 10% penalty and regular income tax on your withdrawn amount. While emergencies may require you to borrow against your 401K plan, consider the consequences before you do.
- Consider using 401K robo-advisors such as Bloom. Fidelity offers robo-advisory services as well. These services automatically balance and manage your portfolio and investments to generate better returns.
- If your employer matches your contributions (only15% of companies do), then take advantage of that matching by contributing to the max amount they will match.