6 Ways To Make Your 401K Balance Grow Faster
Used correctly, a 401K account allows you to take advantage of employer contributions, tax breaks and automatic saving, But you also need to take care to avoid excessive fees and penalties that will reduce your returns. Here’s how to maximize the value of your 401K plan.
- Contribute automatically
Having contributions automatically withheld from your paycheck gets money into your retirement accounts in the most efficient way possible and you don’t have to worry about forgetting to make contributions every month. There’s little temptation to spend the money because it never hits your checking account.
- Increase contributions over time
You might start out saving a small portion of your paycheck because that’s all you can afford early in your career. Remember to increase your contribution rate as you get raises and bonuses. Some 401K plans allow you to sign up for an automatic escalation feature that will boost your savings rate over time without further action required on your part.
- Don’t stick with the default savings rate
Many new employees are automatically enrolled in the company 401K plan typically at the default savings rate of 3 percent. But for most people this savings rate is too low to fund a financially secure retirement, and it might now let you get the maximum possible 401K match either. Pick a saving rate that will be enough to pay your bills in retirement, not the default rate your employer selects for you.
- Get other types of employer contributions
Some employers provide non-matching 401K contributions that might be based on percentage of your pay or company profits. Nonmatching company 401K contributions may be provided in addition or an an alternative to a 401K match.
- Pre-pay taxes
Some employers offer Roth 401K accounts. These contributions are made with after-tax dollars but no income tax will be due on investment gains within the account each year, and withdrawals in retirement, including the investment earnings, will be tax free. Contribution to both a traditional and Roth 401K can add tax diversification to your portfolio.
- Choose low-cost investments
The expense ratio of the funds you choose is deducted from your retirement account balance, regardless of how the investment performs. Use your annual 401K fee disclosure statement to look up how much each investment option is costing you, and consider switching to funds with lower expense ratios.
Brandon, E. (2015, June). Ways To Make Your 401K Balance Grow Faster. https://money.usnews.com/money