4 common mistakes made with a 401(k) plan
An employee might have various benefits during their tenure, such as the ability to contribute to a 401(k) plan—a retirement savings plan that offers tax advantages to savers. Depending on the type of 401(k) plan one picks, the individual may gain benefits such as a reduced taxable income. However, without the proper understanding of a 401(k) plan, one could make multiple mistakes that could affect an individual’s long-term savings.
Switching jobs before becoming vested in a 401(k)
While an employer might match funds in one’s 401(k) account, the employee is not eligible to keep the money until they are vested. This process could be immediate or take years. For example, if the employee leaves the employer before matching the fund’s vest, the former will lose all of them. However, the employee would still be able to keep funds contributed from the paycheck. The individual should check the company’s policy before deciding to leave.
Missing out on employer match
Multiple employers provide matching funds if one contributes to a 401(k), which gives the employee additional incentive to save. For instance, the employer might offer 50% matching on an individual’s contributions up to 6%, meaning one would receive as much as 3% of the salary as an employer match. Not contributing enough to qualify for the company match means one leaves free money on the table. One should max out the employer match to help compound money faster.
Using the funds early
While one might have access to the 401(k) funds, cashing out before age 59 and a half would mean the withdrawal is subject to a 10 percent penalty above the income tax owed to the distribution. Many plans allow hardship withdrawal or loans but also include an added fee. At a minimum, one might miss out on any investment gains the money may have earned.
Constantly checking the balance
Checking the 401(k) account balance constantly makes one anxious that the balance isn’t growing or probably is shrinking. The thought of losing money might cause one to divert from the plan by reducing contributions or halting deposits. So, one must avoid this situation, stick to the long-term investment plan, and invest with this mentality.
