If you have a 401(k) plan through your employer there are a number of things that you really need to know about it in order to take advantage of it as much as possible. Read about them below.
- Rolling over your 401(k) when you leave your employer is not a taxable event, even though many 401(k) participants think that it is. Most experts advise that consolidating more than one 401(k) plan from a former employer into an IRA account is an excellent idea that will help you to handle any beneficiary changes, manager investments and, once you retire, more easily track distributions.
- If you have the choice between a fund or an automated portfolio, in most cases the automated portfolio is the better choice. The reason is that it makes all of your investment decisions for you automatically and allocates your investment dollars across several different asset classes, something financial experts call “diversification”.
- One of the safest investment options offered within a 401(k) plan is a “stable value fund”. These funds don’t fluctuate like stock funds and, if interest rates rise, they won’t go down in value like bond funds.
- Taking an early withdrawal before age 59 ½ doesn’t always mean a tax penalty with your 401(k). In fact there is a special provision that allows individuals over age 55 to take withdrawals without facing penalty taxes or payment provisions, so definitely check with your employer to find out if that’s the case for your particular 401(k).
- 401(k) plans have credit protection by law, thus using those funds to pay off debt or avoid foreclosure isn’t a good idea. Any future bankruptcy that you might face won’t affect your 401(k) so do yourself a big favor and leave it alone so that it’s there when you retire.
- Many 401(k) plans will allow you to make contributions to a Designated Roth account. These aren’t tax-deductible but they do grow tax-free so, once you retire, any withdrawals you make will also be tax-free.
- Employee stock ownership plans (ESOP) usually come with special tax rules that will help you to pay less in taxes when you sell them off. Check with your employer to find out exactly what type of rules have been set up in your company and, if they have net unrealized appreciation (NUA) you might consider purchasing some company stock.
Simply put, the more you know about how your 401(k) functions, how your employer has it set up and what the tax rules are and how they will affect it, the better you will be able to lower your tax costs, increase your retirement “nest egg” and head into retirement with more money and less stress.