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5 Worst Moves You Can Make With Your 401(k)


Stashing money in a 401(k) is one of the best ways to fatten up your retirement nest egg. These employer-sponsored plans offer a tax-advantaged way to save and you may be able to grow your money faster through company matching contributions. Making the most of your savings plan means understanding how it works and what the benefits are. You can improve the odds of reaching your retirement goals by avoiding these common 401(k) mistakes.

Related: How does my 401(k) work?

1. Putting Off Enrollment

Companies typically require workers to be employed for a certain amount of time before they become eligible to enroll in a 401(k) plan. If you don’t sign up as soon as you’re able to, all you’re doing is shortchanging your retirement. Not only do you miss out on the company match but you won’t be able to see any gains if you’re not contributing. The only thing worse than waiting to enroll is not signing up at all.

2. Contributing Just the Minimum

Many companies now use auto-enroll for these accounts. When a company establishes a 401(k) for employees, they have the option of setting a default contribution level. This is the minimum amount you have to put in order to participate in the plan. The most common default contribution limit is 3% of your earnings. While it’s better to save something rather than nothing, you’ll be better off in the long run by chipping in a little or more. So be sure to check the amount even if your company enrolls you automatically.

Generally, the more you make the more you should put into your 401(k). This could be as little as 9% or as much as 20% of your income, depending on your situation. If you’re starting out at a lower salary range, check to see if your company allows you to set up automatic contribution increases. This allows you to bump up the amount you’re saving gradually in order to keep pace with your salary.

3. Not Taking Advantage of Catch-Up Contributions

If you’re over age 50, you have even more of an opportunity to beef up your retirement savings. The IRS allows older workers to make catch-up contributions, beyond the annual maximum contribution limit. For 2014, you could put in up to $17,500 in your 401(k), plus another $5,500 if you’re over 50. Chipping in the extra cash can make a big difference once it’s time to retire.

4. Leaving Your 401(k) Behind

One of the most common mistakes people make with their 401(k) is not taking the money with them when they change jobs. Rolling your savings over into an IRA or another qualified retirement account is a relatively simple process so it doesn’t make sense not to take advantage of the opportunity. Just don’t confuse cashing out your 401(k) and rolling it over as the same thing. You may have to pay taxes on money you take out, not to mention an additional early withdrawal penalty.

5. Borrowing Against Your Plan

Taking out a loan from your 401(k) may be convenient if you find yourself strapped for cash but it’s a bad idea for a couple of reasons. First, you’re not giving your money a chance to grow when you take it out. Even though you’re essentially repaying the loan to yourself you’re still missing out on all the gains you could have enjoyed if you left the money alone.

Second, you run the risk of having to pay taxes on the loan if you lose your job. Most 401(k) plans require you to repay a loan in full within 30 to 90 days if you leave your employer. The IRS considers it to be a taxable distribution if you can’t repay the loan on time. If you borrowed a significant amount, it could push you into a much higher tax bracket. You’ll also have to pay a 10% early withdrawal penalty if you’re under age 59 1/2.

When it comes to retirement, a hands-off strategy won’t work. Taking a proactive approach with your 401(k) puts you in a better position to manage your account so you don’t end up making costly errors.

Photo Credit: Tax Credits