What if someone offered you free money?
Your boss may be offering you an automatic spike in your pay and you may not even be taking advantage of it. If you are with a company that offers a matching contribution of any amount towards your 401k contribution, you need to take advantage of it as it can add up to additional and significant amounts of cash by the time you are fully vested and ready to retire.
To ensure that you take advantage of that perk to its fullest potential, make sure you make at least an equal amount of contribution to the company’s maximum. For example, if your company offers a 50% match on the dollar to up to 6% of your contributions, make sure to contribute at least 6% to get the full benefit and every last dime they are willing to part with.
When it comes to deciding on the investment allocation of your portfolio, you must diversify wisely. Your money should be in a mix of higher risk investments to hopefully generate enough money to beat out the average rate of inflation of 3% and some safer investment to provide you with some assets if the high risk investments decline in value. If offered, you can mix up those allocations with a bit of company stock, but do not put all your money into that one choice.
Penalties for Early Withdrawal
401k plans will be strongest if left alone and not cashed out or borrowed against. By cashing out a 401k plan, you will be subject to not only a 10% early withdrawal penalty from the IRS but also to the 20% federal taxes that the company will pass through to you. By borrowing against your 401k, you also risk devaluing your retirement portfolio.
Even in trying times there are ways to make your 401k work for you and not the other way around. By taking wise, cautious and decisive steps you can empower yourself to take full advantage of your 401k investment plan.