A 401(k) plan is one of the good ways to save for retirement. Contributing in 401(k) will help you save money from your paycheck, and also reduces taxable income. On the other hand, the money saved in a 401(k) plan is tax-free.
But unfortunately, many employees make wrong investment decisions before contributing in 401(k)s. Not only they invest their money in wrong places, but also mishandle their funds.
Here are 4 things you should avoid while contributing in 401(k):
1 Not looking for the percentage you’re contributing
Today, many companies have started to enroll their employees in a 401(k) plan at the time of their joining. This concept was initiated due to non-cooperation of many employees for contributing in 401(k) retirement accounts. So, the companies started an automatic enrollment plan for their employees. The motive was to increase overall participation.
Automatic enrollment system is good, but it also has a downside. Many employers might enroll you at a low contribution rate, and some of them may not allow you to contribute to retirement.
So, employees with low contribution rate might want to work longer for increasing their total contribution. It is also possible that due to the low contribution rate they might ignore to get enrolled at all. Sometimes, the employees aren’t even aware of the fact that they are already enrolled from the time they joined the company.
So, to be on the safer side, make sure you check the percentage you’re contributing in 401(k) from your paycheck. Generally, it is advised to contribute around 10%-15% of your income to your retirement account.
2 Gamboling your money on high-risk investments
Many individuals are attracted to the lure of high yields in short periods of time despite the possibility of high losses. losses. Some of the high-risk investments are:
- Leveraged Oil ETFs
- Currency trading
- Venture capital
- Foreign emerging markets
- Real estate investment trusts (REITs)
- High yield bonds
- Stock market
If you're new in the investment market, you probably choose to invest in mutual funds rather than these risky assets. Some people also use their 401(k) investment money towards investing in the mutual funds that'll cover different stocks and bonds.
3 Heavily borrow money from own 401(K)
Many individuals take out money from their 401(k)s and for various reasons. It may be for paying off debt, for building a new home, or just to renovate your existing home, etc.
You must keep in mind that your 401(k) contributions are for helping you save money for your future, not for spending. There are many drawbacks if you utilize money from your 401(k). If you use it for long-term investments, it boils down for long-term satisfaction, rather than your future security.
If you want to make a withdrawal from your 401(k) before age 55, you are likely going to face some strict penalties. Any withdrawal from your 401(k) will be treated as taxable income and subject to income taxes, and you might also be charged an additional 10% early distribution penalty.
4 Not thinking about your asset allocation
If you still want to use your 401(k) for investment, it is wrong to engage all of that money into one option or company. It may be worth to take risks, but you must diversify your 401(k) fund. That means you must not invest your entire retirement savings into buying only stocks, or similar options.
It is important to do proper research and allocate your assets accordingly after considering your age and risk level. Practically, it is wise to take higher risks when you are young so that you can take aggressive steps. If you are older and belong to the high-risk category, it is good to follow proper guidance and avoid high risks.
So, you must be properly educated and well informed before using your 401(k). After all, you have to take care of every investment you require to secure your financial future, after retirement.