What Should I Do with My 401k Right Now to Avoid Common Mistakes

Don't touch your 401k unless absolutely necessary, as fees can eat away at your savings.

It's estimated that the average 401k plan has fees that range from 0.5% to 1.5% of your account balance.

Consider consolidating your 401k accounts if you've changed jobs or have multiple plans. This can simplify your finances and reduce administrative costs.

Research shows that having too many 401k accounts can lead to higher fees and decreased investment performance.

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You have several investment options to choose from in your 401(k) plan. You can spread your money over several funds, or diversify your investments by selecting funds with different risk levels. Your asset allocation is your decision, but it's essential to consider your risk tolerance, age, and retirement needs.

You can choose from various fund types, including conservative, value, balanced, and aggressive growth funds. These funds have different investment strategies, ranging from low-risk bonds to high-risk equities. A conservative fund, for example, invests in high-quality bonds and safe investments, while an aggressive growth fund seeks to find the next Apple by investing in emerging markets or new technologies.

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Consider the fees associated with each fund. Actively-managed funds tend to have higher fees due to the cost of hiring analysts to conduct securities research. Index funds, on the other hand, have lower fees since they require little to no hands-on management. Look for well-run index funds with annual fees of no more than 0.25%.

Here are some common fund types you might find in your 401(k) plan:

Investment options in a 401(k) plan can be overwhelming, but let's break it down.

Mutual funds are the most common investment option offered in 401(k) plans, though some are starting to offer exchange-traded funds (ETFs).

These funds contain a basket of securities such as equities and range from conservative to aggressive, with plenty of grades in between.

A conservative fund avoids risk, sticking with high-quality bonds and other safe investments, growing slowly and predictably.

A value fund is in the middle of the risk range and invests primarily in solid, stable companies that are undervalued, typically paying dividends.

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Balanced funds may add a few more risky equities to a mix of mostly value stocks and safe bonds, or vice versa.

Aggressive growth funds are always looking for the next big thing, but may find the next Enron instead, with wild swings between big gains and losses.

Specialized funds may include emerging markets, new technologies, utilities, or pharmaceuticals.

Target-Date Funds are based on your expected retirement date, intended to maximize your investment around that time, with investments changing toward the more conservative end of the investment spectrum as the fund nears its target-date time frame.

Index funds generally have the lowest fees because they require little or no hands-on management by a professional.

You should look to pay no more than 0.25% in annual fees for well-run index funds.

A relatively frugal actively-managed fund could charge you 1% a year.

To avoid high fees, consider the example posted by the Department of Labor, where a 0.5% annual fee resulted in a $227,000 account balance after 35 years, while a 1.5% annual fee resulted in only $163,000.

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Here are some types of fund strategies you might find in a 401(k) plan:

Investing in a 401(k) plan can be a great way to save for retirement, but it's essential to consider your investment strategy carefully. Your risk tolerance is a crucial factor to consider, as it will determine how much of your portfolio to invest in stocks, bonds, or other assets.

Your age is also a significant factor, as it will impact how long you have to ride out market fluctuations. If you're close to retirement, you may want to consider more conservative investments to minimize risk.

Dollar-cost averaging is a good way to invest consistently, regardless of market conditions. This involves investing a fixed amount of money into your 401(k) each month, which can help reduce your cost basis and make your break-even point lower.

Employer matching contributions can provide an instant return, often 25 to 50 percent or more, even if the market is in a downturn. This money is contributed to your account on your behalf, making it all the more important to continue investing despite any bumps your portfolio may face.

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You may need to change your investing strategy as market conditions shift. When interest rates are low, holding bonds may not make sense. Now that rates are higher, some investors think now may be the time to invest in bonds.

It's essential to be aware of the fees associated with your 401(k) plan, as they can eat into your returns. Actively-managed funds are more expensive than index funds, which have the lowest fees because they require little or no hands-on management by a professional.

Here are some general guidelines for investment fees:

Avoid borrowing from your 401(k) plan, as it can nullify the tax benefits of investing in a defined-benefit plan. Borrowing against 401(k) assets can also result in interest and fees on the loan, and may prevent you from making 401(k) contributions until the loan has been paid off.

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Spreading your 401(k) account balance across various investment types makes good sense, as it helps capture returns from a mix of investments while protecting your balance against the risk of a downturn in any one asset class.

Review your asset allocations periodically, perhaps annually, but try not to micromanage. This will help you stay on track and make adjustments as needed.

Some experts advise saying no to company stock, which concentrates your 401(k) portfolio too narrowly and increases the risk that a bearish run on the shares could wipe out a big chunk of your savings. The general rule of thumb is to have no more than 10% of your portfolio made up of company stock.

A balanced blend of growth, fixed-income products, and safety of principal is a good way to create a longevity plan for your assets.

Here's a quick checklist to consider before investing:

Respond to investment loss by staying the course and continuing to invest consistently in your 401(k), even during times of uncertainty. This can help you recover losses faster once the market rebounds.

Taking money out of the market during times of volatility can have the opposite effect of what you might be trying to accomplish. It's better to dollar-cost average, investing a fixed amount of money into your 401(k) each month, regardless of outside market conditions.

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Adding to your 401(k) per paycheck can help you buy some shares at a lower price, reducing your cost basis on your investments. This can eventually make your break-even point lower.

Remember that employer matching contributions increase your returns, regardless of market conditions. These contributions can provide an instant return, often 25 to 50 percent or more, even if the market is in a downturn.

For investors 59½ years of age or older, rolling over your account to an IRA can open up virtually unlimited options for your investments and allow you to diversify and protect yourself in down markets.

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Diversifying your portfolio is a key aspect of an investment portfolio, especially for long-term accounts like 401(k)s. It helps to reduce exposure to one particular segment of the market.

You don't have to pick just one fund, instead, you could spread your money over several funds. How you divvy up your money—or your asset allocation—is your decision.

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Experts advise saying no to company stock, which concentrates your 401(k) portfolio too narrowly and increases the risk that a bearish run on the shares could wipe out a big chunk of your savings. The general rule of thumb is to have no more than 10% of your portfolio made up of company stock.

Diversifying your portfolio allows you to potentially catch some of the upside, even during market crashes. There are stocks that go down and some that go up, and diversifying helps you to take advantage of the latter.

Your risk tolerance, age, and how much you need in retirement are important factors to consider when deciding on your asset allocation.

Here are some guidelines on how much you should have saved at different ages:

Taking money out of the market during times of volatility can have the opposite effect of what you might be trying to accomplish in the long run. It's essential to stay the course in your 401(k) and not let emotions dictate your investment decisions.

Retirement planning and timing are crucial when it comes to your 401(k). Consider your retirement plan and match it with your time horizon, as a 57-year-old nearing retirement will need to approach market downturns differently than a 32-year-old.

Studies have shown that investors who constantly check their portfolios experience a higher degree of loss aversion, making them more sensitive to losses than gains. This can be a major pitfall, especially for younger investors who have decades to recoup losses.

If you're more than 7 years away from retirement, your strategy is simpler: younger investors can afford to take on riskier investments, as the fluctuations in the market are just "noise" in the long run. A big mistake is making your 401(k) too conservative when you have a long time horizon.

The basic rule of thumb is that a younger person can invest a greater percentage in riskier stock funds. Here's a rough guideline based on age:

Your age plays a significant role in determining how to invest for retirement.

As you get closer to retirement, it's essential to gradually reduce your holdings in riskier funds.

A younger person can invest a greater percentage in riskier stock funds, potentially leading to big gains.

However, there's time to recoup losses since retirement is not imminent.

The traditional guidance is that the percentage of your money invested in stocks should equal 100 minus your age.

But with increased life expectancy, this figure has been revised to 110 or even 120.

For example, a 30-year-old would invest 90% of their portfolio in equities, while a 70-year-old would invest 50%.

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To determine how much you should give to your retirement funds, consider aiming to replace 80% of your income before retirement. This is a general rule of thumb recommended by many financial advisors.

You can estimate the amount you'll need by multiplying your pre-retirement income by 12, as a rough guide. For example, if you were making $50,000 a year, you should have about $600,000 saved in your 401(k).

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Using a retirement calculator can provide a more accurate estimate, taking into account different assumptions and automatically calculating the required savings amount. Many financial institutions offer online retirement calculator tools that can help you plan.

Contributing enough to your 401(k) to maximize your employer's match is often advised, as long as you can afford to do so. This can be a significant boost to your retirement savings.

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Matching your retirement plan with your time horizon is crucial to ensure you're on track to meet your savings goals. Consider when you're looking to retire, as a 57-year-old nearing retirement will have a different strategy from a 32-year-old. It's essential to approach market downturns with a different mindset.

A 30-year-old should have saved around $96,514 for retirement, with an emergency fund of $17,966 to $35,933. By 40, that number jumps to $379,398, with an emergency fund of $22,735 to $45,469. The savings goals are based on recommendations from Fidelity and use data from the U.S. Bureau of Labor Statistics' Consumer Expenditure Survey, 2023.

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Regrets about not saving enough for retirement early on tend to grow with age. A 2024 Bankrate survey found that 37 percent of baby boomers and 26 percent of Gen X reported this as their top financial regret. In contrast, only 13 percent of millennials and 5 percent of Gen Z reported this regret.

Here's a rough guide to retirement savings goals by age:

As you get closer to retirement, it's essential to rebalance your portfolio to maintain your desired asset allocation. This means selling some of your small-cap holdings and reinvesting the proceeds in large-cap stocks if the small-cap portion of your portfolio grows more quickly than the large-cap portion.

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You can withdraw money from your 401k, but be aware that it's subject to a 10% penalty if you're under 59 1/2 years old.

Withdrawing from your 401k can also impact your retirement savings, potentially reducing the amount you'll have available in the long run.

You can borrow up to 50% of your 401k balance, up to a maximum of $50,000, and repay it with interest over 5 years.

Borrowing from your 401k can be a good option if you need money for a down payment on a house, but be aware that it's not a free loan and you'll still have to pay interest.

The interest rate on a 401k loan is typically lower than other types of loans, but it's still interest that you'll have to pay back.

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Long-term investing is key to reaching your retirement goals. You want to keep investing consistently with your goal in mind from the start, even during times of uncertainty.

Dipping into your retirement funds to cover a short-term need can interrupt the potential for the funds to grow through tax-deferred compounding. This could make it more difficult for you to reach your retirement goals, and might even cost you more in the long run.

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One good way to align your retirement planning goals with your investments is dollar-cost averaging. This method involves investing a fixed amount of money into your 401(k) each month, regardless of outside market conditions.

Adding to your 401(k) per paycheck can help reduce your cost basis on your investments. This can eventually make your break-even point lower, which can help you recover losses faster once the market rebounds.

Employer matching contributions can provide an instant return, often 25 to 50 percent or more, even if the market is in a downturn. This money is contributed to your account on your behalf, making it all the more important to continue investing despite any bumps your portfolio may otherwise face.

If you're 59½ years of age or older, consider rolling over your account to an IRA. This will allow for more investment options and can help you diversify and protect yourself in down markets.

Here are some key takeaways to keep in mind:

Transferring and consolidating your 401(k) can be a bit overwhelming, but it's worth taking the time to consider your options.

Consolidating your 401(k) into one account can make it easier to track and manage your money. You may have multiple 401(k) plans from previous jobs, and keeping track of all those accounts can be a lot of work.

You may be able to leave your 401(k) in your former employer's plan, which can be a convenient option. However, you'll need to ask if this is an option and if there are any restrictions on smaller value accounts.

Consolidating your 401(k) can also help you avoid extra fees associated with multiple plans. Fees may include sales loads, commissions, fund expenses, advisory fees, plan administration, and customer service.

If you roll over your 401(k) to an IRA, you may have a broader range of investment options and better service. This can be a great opportunity to diversify your portfolio and potentially grow your savings.

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You should also be aware of the tax implications of transferring your 401(k). If you cash out your 401(k), you'll typically be required to pay taxes on the withdrawal at your ordinary income tax rate, and may also face a 10% penalty fee for early withdrawal.

Here are the three primary ways to transfer your 401(k) when taking a new job:

It's worth noting that the mandatory 20% withholding on distributions will not apply if you roll over the money into an IRA. However, you'll still face the 10% penalty for premature distributions if you're younger than 59½.

You can withdraw from your 401k penalty-free after age 59 1/2, but it's generally recommended to keep your retirement savings intact until then.

Some employers offer in-plan annuities, which can provide guaranteed income for life in retirement.

Consider the tax implications of your 401k withdrawal, as it will be taxed as ordinary income.

A high tax bill can be a stressful and unexpected surprise.

If you've recently received a tax bill, it's likely because you owe taxes on unreported income, such as freelance work or investments.

According to the article, the IRS requires individuals to report all income, regardless of the source.

A common reason for a high tax bill is the failure to take advantage of tax deductions and credits, such as the Earned Income Tax Credit (EITC) or the Child Tax Credit.

These credits can significantly reduce your tax liability, but you must meet the eligibility requirements and file the necessary forms.

If you're self-employed, you may be required to make estimated tax payments throughout the year to avoid a large tax bill.

However, if you're not making these payments, you may be subject to penalties and interest on the amount you owe.

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A traditional IRA and a Roth IRA are both popular options for saving for retirement, but they work in different ways.

With a traditional IRA, you contribute money that reduces your taxable income for the year, which can lower your tax bill.

You can deduct the contributions you make to a traditional IRA from your taxable income, which can save you money on taxes.

However, the money in a traditional IRA grows tax-deferred, meaning you won't pay taxes on the investment gains until you withdraw the money in retirement.

You'll pay taxes on the withdrawals when you retire, which may be at a higher tax rate than you're paying now.

A Roth IRA, on the other hand, is funded with after-tax dollars, meaning you've already paid income tax on the money you contribute.

You won't get a tax deduction for the contributions you make to a Roth IRA, but the money grows tax-free, meaning you won't pay taxes on the investment gains.

You won't have to pay taxes on the withdrawals in retirement, which can be a big advantage if you're in a higher tax bracket then.

You can withdraw the contributions you made to a Roth IRA at any time tax-free and penalty-free.

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However, you'll need to wait at least five years after opening a Roth IRA to withdraw the earnings tax-free and penalty-free.

It's worth noting that while the Roth IRA has some restrictions on withdrawals, a traditional IRA has its own set of rules, such as required minimum distributions (RMDs) starting at age 72.

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You can avoid unnecessary taxes and penalties by leaving your 401k alone until retirement.

The earlier you withdraw from your 401k, the more you'll pay in taxes and fees.

If you're under 59 1/2, you'll face a 10% penalty on top of taxes for early withdrawal.

It's a good idea to have an emergency fund in place before tapping into your 401k.

Aim to save 3-6 months' worth of living expenses in your emergency fund.

Consider consolidating your 401k accounts if you've changed jobs and have multiple accounts.

Consolidating can simplify your financial life and reduce fees.

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Building a secure retirement plan requires careful consideration of your 401(k) investments. You should aim to contribute enough to maximize your employer's match, which is essentially free money.

To make informed decisions, consider your risk tolerance, age, and the amount you'll need to retire. This will help you choose the right investment options for your 401(k) plan.

A key principle to keep in mind is to avoid funds with high fees, as they can eat into your returns. Actively-managed funds often have higher fees than index funds, which are generally a better choice.

Diversification is also crucial in mitigating risk. You can achieve this by investing in a mix of mutual funds that range from conservative to aggressive. This will help you spread your risk and potentially increase your returns.

Here are some key takeaways to consider:

By following these principles and takeaways, you can create a solid foundation for your retirement savings and make the most of your 401(k) plan.