For many working Americans, a workplace retirement plan such as a 401(k) is the single most important tool for building long-term wealth. It makes saving automatic, offers valuable tax benefits and often comes with free money from your employer. Yet many employees don't take full advantage of their plan. A few smart decisions can make a big difference over the course of your career.
Start with the employer match. Many employers match a portion of the money you contribute, for example, by adding 50 cents or a dollar for every dollar you save, up to a certain percentage of your pay. If your employer offers a match, contributing at least enough to receive the full amount is one of the best financial moves you can make. Anything less means leaving part of your compensation on the table.
Traditional or Roth contributions
Many plans let you choose between traditional pre-tax contributions and Roth contributions. Traditional contributions lower your taxable income today, and you pay taxes when you withdraw the money in retirement. Roth contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. Your choice depends on whether you expect your tax rate to be higher now or later, and many people use a mix of both.
Pay attention to your investment choices. Many plans offer target-date funds, which automatically adjust their mix of stocks and bonds as you approach retirement, as well as a selection of individual funds. Look at each fund's expense ratio, since lower fees mean more of your money stays invested and working for you over the decades.
Understand your plan's vesting schedule. Your own contributions always belong to you, but employer contributions may vest over several years. If you're considering a job change, knowing when your employer's contributions become fully yours can help you time your move wisely.
Try to increase your contribution rate over time. A simple strategy is to raise your savings by one percentage point each year, or whenever you receive a raise. Many plans offer an automatic increase feature that does this for you. Avoid borrowing from or cashing out your 401(k) early when possible, since withdrawals before retirement can trigger taxes and penalties and interrupt your long-term growth.
When you change jobs
When you leave an employer, you typically have several options: leave your savings in the old plan, roll it into your new employer's plan, roll it into an IRA or cash it out. Rolling over keeps your money growing tax-deferred, while cashing out often means taxes and penalties. A direct rollover is usually the simplest and safest way to move your money.
Finance Work Hub helps working professionals in Plymouth and across Massachusetts review their workplace plans, choose investments and plan rollovers. Contact us for a free retirement plan review.