You probably have heard of 401(k) plans, even if you don’t have one yourself you’ve probably heard them referenced on TV or in movies.
401(k) Plans are tax advantaged saving plans. The basic ones function by allowing you to save money without paying taxes on it now, but then you pay the taxes in the future when you withdraw the money. There are also Roth saving accounts, which allow you to put in money after taxes but then allow you to make tax-free gains from those investments.
401(k) accounts are often associated with your workplace, where companies set them up for employees and then match contributions up to a certain point. If you can, you should always try to contribute enough to get the maximum matching, because that’s just free money that you’re getting paid that will help you out later in life.
Here are some suggestions for making the most of your 401(k) plan:
- Diversify your portfolio: Don’t just buy one stock, especially don’t just buy stock for the company that you’re working for. You might feel like you have firsthand knowledge of the state of the company, but if something unexpected happens you don’t want to lose your job and your portfolio all at once. This is good advice for any retirement investments.
- Borrow sparingly: You may think of the accounts as a good place to borrow money from, it’s your money after all, but when you borrow from your accounts you end up losing any kind of tax advantage, and you may end up owing a tax penalty instead.
- Roll over: You have to resist the temptation to cash out when you leave a job. You should roll it over to you new job’s retirement plan instead, and you’ll avoid the taxes and penalties. A good financial advisor can help you with this, and we can recommend several.