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401 (k) is a popular retirement savings tool for a number of reasons, including its prevalence, its potential for equivalence with its employer and its tax benefits – which attracts all workers who pay wages in anticipation of their retirement. There was $ 5.6 trillion in 401 (k) s at the end of last year.
But with so many people using 401 (k) plans, it's worth asking if they are really getting the most out of all the benefits of a 401 (k) retirement plan. After all, you only want to retire once and you do not want to leave money on the table. Here are five ways to maximize your 401 (k) this year.
Getting the most out of a 401 (k) can pay off on the road. Source of the image: Getty Images.
1. Use a tax-efficient asset location
Traditional 401 (k) plans, which means they are not Roth accounts, offer two major tax benefits: Contributions and investment gains are taxable only when you withdraw the money. The contribution is tax deductible, which decreases your taxable income in the year you create it, saving you tax today. Then, the investment gains are deferred, so that more money is reinvested in your wallet, thus increasing your nest egg.
One way to make the most of the tax deferral is to know the location of the assets, which differs from the asset allocation. Asset location involves placing inefficient tax investments, such as those with high trading volumes (such as actively managed mutual funds) or those with high interest rates. or returns (such as high-yield bonds and real estate investment trusts or REITs) in places that do not tax earnings, such as a 401 (k).
By hosting tax-inefficient investments in a 401 (k) account and instead of an ordinary brokerage account, you avoid income tax on interest and income from your investments. Accounts outside of 401 (k) are good locations for index funds that are generally tax efficient or for individual stocks that are also efficient – meaning you do not trade them much and you do not realize no taxable earnings. Maximizing a 401 (k) means making the most of a 401 (k) tax report by using it as a place for your inefficient tax investments.
2. avoid fees
You may not see an invoice for investment services, but a fee will be charged from your 401 (k) funds every day. Fees are a drag on your return, which means less profit for you and a smaller nest egg in the long run.
When choosing investments in your 401 (k), it makes sense to know what the fees are. You can check with the fund administrator or read the required summary plan document that each 401 (k) has. Some active mutual funds are more expensive than others. Fund families such as Vanguard or T. Rowe Price are generally inexpensive, while other mutual fund asset costs can be very expensive. Try to keep the 401 (k) mutual fund fees below 1%.
3. Take advantage of in-service distributions
You do not like mutual fund choices in your 401 (k)? Some 401 (k) s offer a brokerage solution in which you can buy more funds and different shares as part of the plan. This is a solution.
It is also possible that you can make an in-service distribution, ie a tax-free withdrawal directly to an individual retirement account (IRA). Once the 401 (k) money is transferred to your IRA, you have a greater choice of mutual funds or stocks to choose from. Consult your fund administrator or summary plan document to determine if in-use distributions are allowed. This can be a great way to increase your investment choice. Why limit yourself?
One of the drawbacks of in-service distribution to an IRA is that you lose the ability to borrow against your nest egg. Most 401 (k) plans allow you to borrow from the plan, but not the IRAs. While this may be a good thing, experts advise against looting your retirement account to cover your expenses. IRAs allow for the removal of hardship or special one-time expenses of less than 59 1/2 for certain reasons.
4. Consider a Roth 401 (k)
More and more 401 (k) providers are beginning to offer a Roth 401 (k) option. Saving in a Roth 401 (k) is not an all-or-nothing decision. You can pay Roth contributions and regular pre-tax or regular contributions up to the annual limit of 2019, or $ 19,000.
The tax treatment of a Roth account works in the opposite direction to that of a traditional 401 (k), offering different benefits. While a pre-tax contribution to a traditional 401 (k) reduces your taxes today and withdrawals are taxed, a Roth is funded by an after-tax amount, and eligible distributions are not taxed at retirement.
The use of a Roth 401 (k) can be a good idea for high-income people who do not perceive as much benefit as the traditional 401 (k), or for people who think to be retired in a higher tax bracket than today.
Investors may consider paying certain Roth contributions to diversify their future tax liabilities upon retirement. This can be a long time for younger savers, but if you can have tax free retirement income via the Roth, this can help you reduce your overall tax rate on other sources of income. retirement income such as social security or pensions.
5. Check your beneficiaries
As with any other account, make sure the recipients are up to date. This may seem trivial, but our lives have a way of changing and you want to make sure that your main beneficiaries and potential beneficiaries are up to date. This is especially true for the 401 (k) s left with a former employer, sometimes forgotten.
The 401 (k) is a great place to save for retirement. If you maximize all that the plan offers, your money can work more efficiently. and Stronger.
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