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ScaredyCatGuide to the 401(k) - Part 14: 401(k) Mistakes to Avoid

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Some of the biggest problems with 401(k) management are the result of either doing too much with your account or doing nothing at all. Performing the occasion rebalancing is important, but you also don’t want to start “trading” your account and racking up fees.

Avoiding the common mistakes listed below can be simple if you always keep in mind how your current actions can affect the foreseeable lifetime of your investments.

INVESTING TOO LITTLE TO GET MAXIMUM MATCHING FUNDS

When an employer is matching funds, anything less than receiving the maximum is literally throwing away free money. To review, matching is when your employer contributes to your 401(k) based on the amount you contribute.

Let’s say your employer offers dollar for dollar matching up to 6% of your salary. If you were to only contribute 3% then your employer would contribute 3%.

In that scenario 3% of your salary would literally be left on the table rather than going toward building your retirement nest egg. If you are financially able to contribute the max amount it is a no-brainer to get the most out of company matching. Would you rather they keep the money?

TAKING 401(K) LOANS FOR THE WRONG REASONS

In difficult times tapping your 401(k) through a loan may seem like a decent idea. It is access to funds at a relatively low interest rate after all. The issue here is the pay back. As discussed earlier this loan requires interest payments and full repayment in five years otherwise taxes and penalties are incurred.

Sometimes circumstances dictate and you do not have a choice. It is the leisure and desire for things that I am referencing here. For example, taking a 401(k) loan to pay for a dream vacation is not very prudent. Not only are you turning an asset into an expense, you are also losing out on the compound growth of those funds over the next five years while the loan is paid back.

MISSING ROLLOVER DEADLINES

IRAs are a popular destination for extra or old 401(k) money. Some companies require you to transfer funds the moment you are no longer employed while others will let you keep your money in their plan, indefinitely.

Rollovers can be direct or non-direct, from one employers plan to the next. Direct rollovers generally require no effort other than signing the requisite paperwork and no taxation is incurred. The funds are transferred directly from your old 401(k) to the new retirement account. On occasion, a plan administrator will not be able to perform a direct transaction.
Instead a check made out to your new retirement account will be made, which you then must deposit.

Non-direct rollovers require a little more action since a check will be cut from your former 401(k) plan administrator to you, at which point you have a window to deposit those fund into a new retirement account to avoid taxation and/or penalties.

The 60-day rollover rule is the most important thing to remember. This is where people run into trouble, that window gives the opportunity to get creative. Since the funds have been made out to you they are available to do whatever you like with over the next 60 days, theoretically speaking. Whether using the money for short-term needs or a short-term investment you are putting your retirement funds at risk.

The plan may be to use the funds on something else and have them back in time to meet the deadline, but if something goes awry and you cannot deposit the funds into your new retirement account they immediately become taxable income and if you are under the 59 ½ age limit the 10% penalty is triggered as well.

Though it may be tempting to use these funds, the risk vs. reward may not be worth the gamble.

Posted Using LeoFinance