Before You Sign Up: 5 Quick Tips For 401ks

March 9, 2015

Don't be overwhelmed with your 401k! This guide makes it simple for you to start, or restart your retirement savings without the overwhelm!

Getting a 401k is one of the easiest ways to start saving for retirement. But before you choose a fund, read these tips to see the best way to maximize your company’s 401k.

 

1.  Matching

The most important aspect of a 401k is the matching program. Many companies offer incentives for their employees to contribute to their 401k by matching some of the contributions. Some match dollar-for-dollar up to a certain amount, others match 50% of what an employee puts in. You want to make sure you understand all facets of the matching program. Do you have to put in 6% of your income to get the full match? Can you put in 15% of your income and the employer will put in 15% as well?

The company match is basically free money. That means that it doesn’t come out of your paycheck, it doesn’t affect any other benefits you receive and it won’t reduce your salary. Even if you’re paying off debt, you should still contribute enough to get the company match because you won’t ever get that money back.

2.  Vesting

One part of 401ks that people rarely mention is the vesting schedule. For many companies, you don’t automatically have access to the company match. When a company has a vesting schedule, it means that you have to work there a certain amount of time before you can claim the company match.

For some it’s a graded schedule, which means that every year, you get a higher percentage of the company match if you leave. For example, if I work at a company with a five-year vesting schedule where every year I get an additional 20%, I have to work there five years before I can leave and take all of the company’s match.

Other companies have a cliff vesting schedule, which means if you leave before the allotted time is up, you won’t receive any part of the company match. If your company has a three-year cliff vesting schedule, you have to work there three years before you can leave your job with the company match.

A vesting schedule doesn’t mean that the company won’t match anything before you’re vested. It just means that if you leave before the vesting schedule is finalized, you won’t be eligible to receive the full amount the company matched.

This is important to note because if you put in 6% of your salary and your employer puts in 6%, you might think you’re contributing 12% of your income toward retirement. But if you leave in year three out of a five-year vesting schedule, it’ll be more like you were putting in 9.6% of your income.

3.  Funds available

It’s important to see what funds you have available when you’re choosing your 401k. A lot of people like target-date index funds, which you choose based on when you plan to retire. For example, a 25 year-old might choose a target-date fund with the year 2055, since they’ll be 65 at that time. The neat thing about these is that they reshuffle as you get older. While you’re young, they’re primarily invested in growth funds, but as you get older, they get more conservative. You can also do research and choose funds on your own. Make sure that you get a good blend so you’re properly diversified.

4.  Roth vs. traditional

Just like with an IRA, you can get either a traditional or a ROTH 401k. The difference is whether you want the tax break now or later. If you choose a traditional 401k, the amount you contribute will be deducted from your salary. That means that the amount of taxes taken out of your paycheck will be lower. If you choose a ROTH 401k, you’ll still be taxed at the same amount. But whenever you withdraw money from your 401k, it’ll come out tax free.

 

5.  Time frame

When are you eligible? I’ve worked at companies where you had to be there a year before you became eligible for a 401k. One of them changed the rules one year so everyone was immediately eligible. It’s important to read any emails you get from HR about your 401k so you don’t miss important changes. I knew someone who missed out on a year of contributions because they missed an email saying they had to transfer their account.

No matter where you work, make sure to educate yourself on your 401k. Sometimes big companies forget to teach every employee about their options, while small ones don’t have the resources to explain what all the funds mean. Sites likes Investopedia and Yahoo Finance can help you understand how well a stock is doing.

 

ZINA

12 comments so far.

12 responses to “Before You Sign Up: 5 Quick Tips For 401ks”

  1. Great article! I love tip number two, very important thing to consider that many people don’t know.

  2. Betsy says:

    My company has a vesting schedule. Which is a little frustrating since I know I don’t want to stay here that long, it makes me not want to contribute very much.

  3. Great post, Shannyn. Just about everyone has heard that it’s a good idea to invest in a 401k, but they don’t always hear about these important details. It’s also good to know what you need to do with a 401k when you leave the company. Sometimes you can leave the money where it is, but in other situations you’ll need to roll it over into another qualified plan or risk an early withdrawal penalty.

  4. Jessica says:

    Love this, super helpful!

  5. Jim Liston says:

    401 K’s are a great way to plan for your future. If you start early enough, it becomes a habit and you don’t even miss the money so it’s painless. But, when it’s time to retire, you’ll be amazed at the amount of money that you’ve acquired.
    Thanks for a great post, I look forward to reading more of your articles.

  6. Debbie says:

    Great tips. I do no think that many people think about the company matching up to a certain amount. Getting that free money is key to growing your retirement, you must take advantage.

  7. Wyatt says:

    I just read on a CNN article that a lot of Americans do not maximize their 401ks. That’s why I always make it a point to convince a colleague or a friend to start saving on it.

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