Many companies offer 401(k)s as the primary means for retirement savings. The Secure Act and Secure Act 2.0 legislation have further incentivized businesses to extend retirement plan benefits to employees. These efforts aim to help make 401(k) plans more accessible and beneficial for employees. Here are a few tips to help you best utilize your 401(k) benefits:
Never delay saving for retirement
The earlier you start saving, the less you have to save. How is that? Compound interest. Use the Rule of 72 to calculate how many years it will take to double your principle: Divide 72 by the interest rate you hope to earn, and that gives you the approximate years it will take for your investment to double.
Never leave a company match on the table
Companies often provide a match to encourage employee savings. But if you don't save enough to max out the match, you are leaving "free" money on the table. The max deferral limit in 2024 is $23,000. And if you are 50 or older, you can make a catch-up contribution of an additional $7,500.
Never put all your eggs in one basket
Diversify your investments. While most fund choices in your 401k represent hundreds of companies, they may just represent one asset class. Markets ebb and flow, so you want to have a diversified portfolio to spread the risk. The one exception is a target date fund that includes many asset classes and reduces risk as you approach retirement.
Never take a distribution before age 59 ½
Life may throw you some curve balls, but only use your retirement accounts as a last resort prior to age 59 ½. Otherwise, the IRS imposes an early 10% distribution penalty, which can undo a lot of your tax deferred savings. The IRS does offer some exceptions, but if you start using your retirement money early, you may not have sufficient funds when you officially retire.
Never take a distribution without examining the consequences
Let's say you want to buy a $50,000 car and take a distribution from a pre-tax retirement account. If your wage income puts you in the 22% tax bracket you will need to distribute over $64,000 to cover the taxes. That distribution could push you into a higher tax bracket, and could include penalties. You may end up buying a very expensive car if you are not careful.
Andrew Cook is a partner at HHM Wealth Advisors in Chattanooga.