What You Need To Know About Your 401K As You Begin
You’ve finished school and started your career. It’s an exciting time and a time full of changes. Taking on the challenge of learning the details of your 401K and taking smart action to make the most of it, is likely the farthest thing from your mind.
Even the thought of trying to understand the rules and possibilities of your 401K may make your eyes roll back in your head. Don’t throw up your hands just yet!
Here are some helpful tips for your 401K to help you get started right and really understand the steps you are taking to set up your future now!
Depending on where you work, you may be able to sign up on your first day. Some companies may require a waiting period before you can participate.
If you can’t contribute right away, use that time to get into the habit of saving money from each paycheck, said Golladay.
For example, if you plan to allocate 6 percent of your salary to your 401(k) plan once you’re able, then take that 6 percent and put it toward an emergency fund or paying down high-interest debt or student loans in the meantime. That way, you’ll get in the habit of saving regularly and improve your financial standing along the way.
Right now, the median contribution for all ages is 7 percent of annual pay, according to the Transamerica Center for Retirement Studies.
“That’s a great start but try to get up to at least 10 percent,” said Catherine Collinson, the center’s president.
Play the match game
One of the greatest advantages of saving in a 401(k) plan is that many companies offer a matching contribution.
While 73 percent of all plan sponsors offer a match, according to Transamerica, a separate report from Aon Hewitt found that nearly a quarter of those workers didn’t get the full amount last year.
If your company has a match, you should contribute enough to take full advantage of it, experts say. Not participating enough to get the full 401(k) employer match is like leaving money on the table, they say.
“The match is like an automatic return on your investment that you can’t get anywhere else,” Golladay said.
Don’t Get Tripped Up
Starting now and taking advantage of matching funds are fundamentals that will pay big dividends for you financially.
Now it’s time to get to the details. Those pesky details that can cost you if you don’t know about them. Take a look. It’s worth your time.
Understand Associated Fees
Fees may vary by plan or investment and it’s important for recent graduates to understand that every investment comes with some kind of fee, such as 401(k) plans, IRA plans or individual stock purchases, says Watt.
New regulations require employers to provide plan participants with detailed information about any fees. Grads should understand the fees charged to the plan and that like all benefits such as medical coverage, they may share in the cost of the 401(k), explains Connelly.
“Ask questions of your employer, financial advisor and/or record keeper as all of these parties should be prepared to share with you what the costs are,” she says. “The money management, advisor, and administration features will have an expense and particular services or features that make these accounts easily accessible may impact the costs.”
Consider consequences of early withdrawal
Unless absolutely necessary, the experts strongly caution against withdrawing from a 401(k) plan before age 59 ½.
“Anytime grads take money out of a 401(k), they face taxes on the withdrawn amount at their normal income tax rates, as well as paying the IRS an early withdrawal penalty of 10%,” says Watt. “It’s generally not worth it for savers to plunder their 401(k) if they need short-term cash.”
Although most plans allow participants to take a loan and many have early withdrawal or hardship provisions, these features are meant to be for need–grads should strongly consider the impact of using the money before retirement and setting themselves back, warns Connelly.
“Early withdrawals undermine that goal you set at the time of entry,” she says. “Before you join the plan, know the provisions in your plan for accessing your balances and then carefully consider all of these options and others outside the plan before making decisions should the need arise later.” – Fox Business