What should I do with my 401(k) right now?
If you’re saving for retirement, you may ask, “What should I do with my 401(k)?” The answer is, it depends. There are many options unique to every situation.
Putting money away for retirement is a cornerstone to any long-term financial plan. One of the most popular and effective ways to save for retirement is through a 401(k). Ideally, you'll be setting money aside for decades during your working years. However, there are many things you can do with your 401(k) right now.
To make sure your 401(k) is still on track to meet your goals, you should be monitoring your balance, reviewing your statements, checking your fees, and analyzing your performance. The steps you take right now will help you when you reach retirement.
Retirement accounts, like 401(k)s, are meant to build wealth while you're working, so you'll have a sizable nest egg when you settle down. The IRS even discourages withdrawing money early by imposing penalties.
Yet, there are a few things you can and should be doing right now to ensure you're maximizing your 401(k)'s potential.
Understand Your 401(k)
There's more to saving for retirement than signing up for your company's 401(k) on your first day. Adequately maintaining a retirement account requires monitoring and understand how it functions.
Check Your Balance
These days, participants can access 401 (k) accounts via an online account, similar to your everyday bank account.
One of the first pieces of information listed is your account balance. Your 401(k) balance will fluctuate daily with each market opening and closing.
It's unnecessary to check your 401(k) balance daily; however, quarterly or yearly checks are great for gauging your investment's performance.
Review Your Documents
There are two main pieces of literature you should be familiar with regarding your 401(k) account: your account statements and your Summary Plan Description (SPD).
Sent to you quarterly and yearly, your 401(k) statement will highlight your investment performances, the money you've contributed, and the money your employer has contributed.
Review your statements regularly to monitor how you're progressing towards your retirement goals.
Additionally, you should familiarize yourself with your 401(k)'s Summary Plan Description. The SPD will list all of the features and rules regarding your 401(k) account. Your plan's administrator is required to provide you with one when you join or whenever you ask for one.
In the SPD, you will find information about the type of plan, contribution sources, vesting schedules, default investments, and whether loans are permitted, among other things.
Find Your Fees
Every investment charges fees, called expense ratios. Whether your 401(k) is invested in a target-date fund, mutual fund, or index fund, there will be some sort of fee to managing that fund.
Some funds like actively managed mutual funds charge over 1% yearly, while others charge a minuscule 0.01%.
You can find your fees either from your 401(k) statement or your online account. Locate what funds your money is invested in and look at the summary of that fund or funds.
Understanding how much your 401(k) investments are charging will help you decide what other investments are better options.
Leave Your 401(k) Alone
One option you have with your 401(k) is to do nothing. If your employer offers to match the money you put into your 401(k), then it's a wise decision to continue contributing to it.
Employer contributions are not taxed when they're put in, meaning they grow tax-free for the duration they’re invested. Your employer is essentially giving you free money for retirement.
To ensure you continue receiving your employer's generosity, maintain at least the maximum amount they will match.
If your budget has more room, consider increasing your contributions. You won't receive any extra match from your employer, but you will be contributing more tax-free money. More money saved during your working years means more money you'll have during retirement.
Diversify Your Retirement Savings
The average 401(k) plan has about 19 different funds to invest in. Ranging from mutual funds, index funds, and bonds, it may seem like all of the bases are covered.
However, there are thousands of funds out there for investors to put their money behind.
By diversifying your retirement accounts, you can reap the benefits of many different investment options.
Continue contributing to your 401(k) if your employer matches; however, consider saving beyond that amount in an IRA.
Separate from your 401(k) plan, IRAs are held by most retail investing institutions. They're free to open, can easily transfer funds to, and have a seemingly endless menu of investment options.
If you're contributing 3% towards your 401(k), consider contributing another 3% towards an IRA. You will diversify your investments, and by receiving an employer match towards your 401(k), you’ll be saving a total of 9% for retirement.
Transfer Your 401(k)
If you want to take money out of your 401(k), you have a few options. Whether you need the money for an emergency or decide you want to invest your money elsewhere, you should be able to access your 401(k) funds.
Check with your summary plan description or plan administrator if and how you can transfer money out of your 401(k).
Rollover to an IRA
There are specific steps to take to ensure your money is transferred correctly. Your IRA institution will have their instructions and your 401(k)s administrator will have their process.
Consolidating your 401(k) with your IRA can help you manage your retirement portfolio all in one account. Making it easier to determine if you're on track to hit your retirement goals.
Take a 401(k) Withdrawal
If necessary, under certain circumstances, you can withdraw money from your 401(k). Depending on the situation, you may or may not incur a 10% penalty from the IRS.
In any regard, you will be required to pay income tax on the amount you withdraw from your 401(k).
Refer to your summary description plan and the IRS guidelines for any restrictions or penalties you'll face in doing so.
Take Out a 401(k) Loan
Many 401(k) plans allow their participants to take a 401(k) loan. Each plan's administrator can set the terms on their 401(k) loans.
A 401(k)'s summary plan description will have the terms of its 401(k) loans; however, the plan's administrator may have more up-to-date information.
Typically, a 401(k) will have a five-year repayment period and be capped at $50,000 or 50% (whichever is less) and charge interest. The interest is paid back into the 401(k), so it's not lost but instead a sort of forced catch-up contribution.
Find Your Old 401(k)s
The average American will have about eight jobs by the time they turn 32. That number is increasing as many companies poach employees away from competitors.
If you've changed jobs few times in your career, chances are you have 401(k)s still sitting in former employers’ 401(k) plans.
It can be difficult to find old 401(k)s and bring them back into your domain. However, it's essential to make sure you don't lose your past savings and can monitor its performance going forward.
Rollover to Your Current 401(k)
If you have a 401(k) account with your current employer, you should be able to rollover your old 401(k)s. Your current plan's administrator can assist in making sure the old funds make it to your account.
This is a great option to have all of your retirement savings in one place for easier monitoring and maintenance.
There aren't any penalties are taxes due for transferring old 401(k)s to a current 401(k) account.
Rollover to an IRA
If you have an IRA with another institution, you can rollover your old 401(k)s to an IRA. You will need to coordinate with your institution and your old 401(k) plan to facilitate the transfer.
You won't be able to rollover an old 401(k) to a Roth IRA. You will need to open a traditional IRA or, perhaps, a specific Rollover IRA account.
Either way, this is a great option to consolidate old 401(k)s into one account with a broader array of investment options.
How to Decide What to do With Your 401(k)
What you do with your 401(k) is an individual choice. Your retirement goals, where you currently are in your career, and how much you have saved in retirement should all be considered.
Some options come with penalties and taxes; others don't. Some provide more opportunities to invest and diversify your money.
If you're having trouble finding old 401(k)s or your current fees or deciding what to do, consider consulting a professional to determine what is best.