Ah the 401k, probably the most common investment vehicle around in corporate America, and easily the most neglected by employees. A 401k is named for the section of the tax code that applies to company plans. These starting popping up in the 1980’s when companies looked at other employee benefit options as pension plans became more expensive.
Am I contributing enough to my company 401k?
The 401k can be an essential part of the retirement nest egg, and many people wonder if they are contributing enough. The first question you should be asking yourself is “How much will my budget allow me to put in the 401k?” If you don’t know, it’s definitely time to do a monthly budget. The worst thing you can do is put in more than your budget allows, get yourself in a cash flow crunch and borrow from your 401k down the road.
If you have room in your budget, we suggest working with a financial planner to help you determine what your contributions will produce for you down the road. They will factor social security, pensions and any outside investment accounts into the picture as well to determine if you are putting in enough each pay period.
Many 401k providers (Fidelity, Vanguard for example) will also offer an online calculator to project what your account value might be when you retire. When using a retirement calculator, it’s usually a good idea to undershoot on the investment return over time (4-6% is recommended, but can vary with investment choices, which we will discuss later) as well as your retirement date. If need be, you can take less from your accounts in retirement, or work a year or two longer to make up any shortfall.
Should I contribute over the company match?
A company match is a great benefit, and one that we have seen a lot of employers remove over the last 5-10 years. We always suggest putting in enough to get the full company match, but anything over that becomes tricky depending on each individual’s situation. To determine which option might be best for you, it’s always a good idea to work with a financial planner along with your tax professional.
What investments should I choose in my 401k?
This is a very common question that gets overlooked. Most people opt to use target date funds (those ones with the date at the end, for example, XYZ Retirement fund 2025) that move from growth-oriented to more conservative as you get closer to your retirement year.
Should I use the 401k Roth option?
Some 401k plans offer a Roth contribution option that allows you to add money to the plan after you pay taxes on the contributions. Like the ROTH IRA outside a company plan, your after tax dollars go in, and any gains you have in the account can be withdrawn tax free if you take them out after age 59.5.
What happens to my 401k money if I leave this job?
If you leave your current employer, you can either keep your funds there or rollover your contributions and you company match (if you’ve been there long enough for your company’s matching contributions to vest, this differs depending on the plan) to a traditional IRA, or to your new employer’s plan. A financial planner and tax professional would also valuable to determine which option might be the best for you.
If you have additional questions about your company 401k your HR department might have other resources to assist you, or you can email me at brian.ruff@lpl.com