How to Manage Your 401(k)

In the early 1980s, the Internal Revenue Service introduced a tax-deferred method for US citizens to set aside savings for their retirement. Today, a 401K investment option is provided for employees by a great majority of the nation’s employers. A 401K plan allows a participant to set aside a portion of their pre-tax earnings until the age of 59 and 6 months, at which time they can begin taking taxed distributions with no penalty.

If you have your own 401K plan, there are some things you can do to enhance your profits and protect your savings. Here are a few strategies you should consider to help you properly manage your account:

Maximize Benefits

If your employer offers a proportionate matching benefit, it would be prudent for you to maximize the amount of your contribution in order to maximize the amount your employer is offering. This is a pure benefit that simply increases your employment benefits package.

Risk Assessment

Most 401K accounts allow the participant to manage their own investments. It’s your job to decide how much risk you are willing to take. Remember, the higher the risk might be, higher the returns will usually follow. As a rule of thumb, you’ll want to invest a least a portion of your account on high return investments. Also, you might want to consider taking extra risks if retirement is multiple decades away.

Index Funds Are Your Friends

Instead of trying to find singular investments that offer good returns, investments in index funds have consistently proven to be reliable. Fund managers will usually be more adept than you at picking the right stocks at the right times. Diversity is an important attribute in long-term investing.

Avoid Early Withdrawals

The tax code for 401K accounts is designed to discourage any early withdrawals. Short of an absolute emergency, you should plan on leaving your 401K account intact until you hit the age of 59 and 6 months. The penalty for early withdrawals in 10%. You might also lose a portion of your employer match is you have not yet met the plan’s vesting requirements.

Remember, Social Security was never intended to be a person’s only source of retirement income. You have a personal responsibility to provide for your own future. In that regard, a 401K account is one of the best investments you can make.

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This article was originally published on jbowmanaccountant.org