401(k) Mistakes to Avoid
FEES AND PENALTIES FOR your 401(k) can often be avoided if you understand how your 401(k) plan works. You can also take advantage of employer contributions and tax breaks once you figure out how to qualify.
Take care to avoid these 401(k) mistakes:
- A low default savings rate.
- Missing out on the 401(k) match.
- Failing to maximize tax breaks.
- Automatically accepting the default investment.
- Paying excessive 401(k) fees.
- Leaving the company before you are vested.
- Triggering the 401(k) early withdrawal penalty.
- Initiating a 401(k) loan.
- Forgetting to take 401(k) distributions in retirement.
- Ignoring old 401(k) plans.
Here’s how to fix several common 401(k) problems.
A Low Default Savings Rate
Many employees are automatically enrolled in a 401(k) plan, typically at the default savings rate of 3%. But sticking with this low savings rate could be a mistake.
“That 3% is not enough,” says Shannon Nutter-Wiersbitzky, head of participant strategy and development at Vanguard. “If a younger person could start at the 12% rate, they are certainly going to benefit tremendously from the benefit of compounding over time.”
If you can’t save that much at the beginning of your career, aim to increase contributions each year. “It’s typical that you would start at potentially a lower percentage and then increase that over time,” Nutter-Wiersbitzky says. “If you generally get your raise at the end of the year, set your 401(k) to automatically increase. You won’t feel it as much in terms of what is being saved for you out of your pay.”
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