3 Common 401(k) Mistakes That Will Cost You the Most

SmartAsset - copyright 2018

Ellen Chang | APR 30, 2019

Fidelity recently reported that over 168,000 people are now 401(k) millionaires.

Since 401(k) plans are such an important retirement savings tool, it’s important not to make avoidable mistakes, many of which are not reversible. Consulting a financial advisor is strongly recommended before making any drastic investment changes.

3 of the Most Common (and Costly) 401(k) Mistakes

1. Cashing out a 401(k) plan when changing jobs

When you change jobs, it’s important to roll your 401(k) from your previous employer into an IRA or Roth IRA. Cashing out your current 401(k) plan means you will have to pay taxes on the balance and an additional early withdrawal penalty. In some cases, you can also roll your 401(k) into a new 401(k) plan with your new employer. 

Or, consider rolling it into a Roth IRA. Since a 401(k) consists of pre-tax dollars, you’ll have to pay tax on the current balance when you roll it over, but any withdrawals you make in the future will be tax free. It’s highly recommended to discuss this option with a financial advisor before taking action. 

2. Missing out on an employer match

Even if you’re not meeting the maximum annual 401(k) contribution limit, it’s important to contribute enough to meet your employer’s match, which is free retirement money for you. Speak with someone in your company’s benefits department to see if an employer match is available.

3. Borrowing Against Your Plan

If you find yourself strapped for cash, taking out a 401(k) loan might be your only option. However, it’s strongly discouraged because premature withdrawals prevent your money from growing to its full potential, on top of an early withdrawal penalty if you’re younger than 59 1/2 years old. You also run the risk of having to pay taxes on the loan if you lose your job, as most plans require you to repay the loan in full within 30 to 90 days if you leave your employer. 

The Best Way to Avoid Common 401(k) Mistakes

Making costly mistakes with a 401(k) is regrettable, but also avoidable. One of the easiest way to avoid simple mistakes like the ones listed above is consulting a financial advisor before making any major changes to your account. 

Financial advisors are skilled in developing retirement savings strategies tailored to your specific situation. They can provide objective advice on how best to maximize contributions and offer alternative solutions to borrowing against your retirement. 

While the value of working with a financial advisor varies by person and advisors are legally prohibited from promising returns, research suggests average additional investment returns can range from 1.5% to 4% each year. 

Chances are, there are several highly qualified financial advisors in your town. However, it can seem daunting to choose one. 

This award-winning tool makes it easy to find the right financial advisor for you. Now you can get matched with up to three local fiduciary investment advisors that have passed a rigorous screening process.

Follow These Steps for Better Financial Future

1. Simply enter your ZIP code below.

2. After you enter your ZIP code and answer a few questions about your financial goals, you can compare up to three top advisors local to you and decide who to work with.

3. Enjoy a better financial future!

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