We at B&J love to share tips from our Houston Bookkeeper including lots of investment tips. While we won’t tell you what to buy, when to sell, or any of that other jargon, we can tell you the essentials. One of the most common ways our bookkeeping clients invest is through their 401(k). This is a standard retirement plan with plenty of tax benefits and incentives to get you going. But there are also pitfalls to this account. Below, are the 7 worst 401(k) mistakes we’ve seen.
1. Not Having One
Almost every full time job offers some sort of retirement plan, and this usually includes a 401(k). Information can often be found on the forms human resources gives you when you first start a job. According to How Stuff Works, they advise employees to pay 12% of their salary into their 401(k). We do not recommend a flat rate for all of our clients. Each varies on their circumstances. However, if your employer has a matching plan, do take advantage of it.
2. Get Your Own
So your employer doesn’t offer one or you are one of the many self employed? You are free to open your own retirement account, although it may not be an official 401(k). It’s as simple as visiting your bank, picking up the phone, or going online. Do a little research first. There are sites such as The Motley Fool, IRA Reviews, and Bankrate that can tell you the pros and cons of each, as well as make recommendations.
3. 401(k) vs IRA
We often see those who are confused by the difference between a 401(k) and an IRA (individual retirement account). In short, the 401(k) is done between the employer and the employee. The self-employed also have options here. An IRA is done solely by the individual. A huge benefit of the 401(k) plan is they have higher contribution limits than IRAs.
Using this year as an example, in 2017 you can contribute up to $18,000 in tax free funds to your 401(k). You can only contribute $6,500 tax fee to your IRA in 2017. If you are older than 50, you can contribute up to $24,000 tax free into your 401(k) or almost 4 times what you can contribute to your IRA.
4. Don’t Let the Bank Control Your Investments
Many 401(k)s can come with default investments. These tend to be more conservative but can cost big if they are wrong. As said by CNN, “it’s hard to beat inexpensive, broad-market index funds.” These include funds based on the S&P 500, total United States, or global stock market. They can earn a higher rate of return than managed mutual funds.
5. Know the Fees
Nothing is free, including your 401(k). Each bank provides different rates for different services. Your employer should have shopped around for the best deal but may not have. Use a tool like the one at Bright Scope to compare these fees.
6. Cashing Out Too Soon
Even if you change jobs, you don’t have to change your 401(k). There are rollover options and more to keep it going. Emergencies and expenses always come up but it’s no time to reach for your retirement funds. Even withdrawing $20,000 that could have remained invested for 20 years can cost around $90k if it averages the 8% annual growth. The same goes for borrowing from your 401(k).
7. Close Correctly
When you are ready to close out your 401(k), there are smart ways to do it. Some choose to take out the entire sum and spend it immediately. This scenario can lead to disaster. A smart decision may be to convert your fund into an annuity. This will allow you to receive monthly payments during your retirement. If it is procured from a highly rated insurer, it can be as if you have near-guaranteed income. For this option pick a fixed annuity and not a variable or indexed one.
Houston Bookkeeper Tips
If you would like to speak to our Houston bookkeeper about how to invest and much more, feel free to contact us for assistance.
