3 End of year 401 (k) worth doing

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a man holding a sign: 3 End of year 401 (k) Worth doing

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3 End of year 401 (k) worth doing

The great thing about 401 (k) plans is that they make saving for retirement an automatic process. With a 401 (k), you sign up, tell your payroll department to deduct a certain portion from each paycheck, and actually call it a day. But with the end of 2020, now is the time to give your 401 (k) some extra attention. Here are three important steps to take before the end of the year.

1. Boost your savings rate

Many people lost their jobs earlier in the year when the pandemic first hit and put their 401 (k) contributions on hold as a result. If you’ve done the same, but are back to work and in a much better financial situation, then it’s worth considering increasing your contributions to compensate. Likewise, if your income has remained stable throughout the year and you haven’t yet reached your maximum 401 (k), it pays to put more money into that account. The more you contribute to a traditional 401 (k) of your income, the more tax savings you realize.

a man holding a sign: man holding a small white card with 401K on it in red

But if you’re going to increase your 401 (k) contributions, don’t wait. Unlike an IRA, where you can write a check and immediately deposit that money into your account, 401 (k) funds come out of payroll and it may take your employer a while to initiate a change. Move soon so you don’t miss the chance to put more money into your account before the end of the year.

2. Submit a CARES Act distribution if you are able to

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The CARES law, which was enacted in late March to provide relief from coronaviruses, has allowed pandemic-affected retirement savers to withdraw up to $ 100,000 from a 401 (k) or IRA. If you have withdrawn money from your savings, but your situation has improved since then, it is best to consider putting back that distribution.

Normally, 401 (k) withdrawals made before age 59 1/2 incur a penalty of 10%. The CARES Act waives this penalty, but it does not waive the taxes that accompany the withdrawal of a distribution of a traditional 401 (k). However, if you return this money to your account, you won’t have to face these short-term taxes. Equally important, you will give that money a chance to grow.

3. Check your investments

Your 401 (k) money should work for you by generating the highest possible return with the lowest possible fees. The end of the year is a great time to check the composition of your investments and make the necessary changes. If you find that you are paying a lot of fees on your account, you can move some of your investments from actively managed mutual funds to index funds, which are passively managed and therefore don’t charge as much.

Of course, you’ll also want to make sure that your 401 (k) is invested appropriately given your age. If you are younger you should be heavily invested in stocks. If retirement is near, you should have some of your investments in bond funds, which are usually much less volatile.

Many of us can’t wait for 2020 to end. But before that happens, take a closer look at your 401 (k). There are just a few things you can do to help ensure that your account will serve you well both immediately and in the long term.

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