Tips for the 401k Investor

401ktipadMore and more individuals are investing in 401k plans through their employer.  This market has grown to over $500 billion dollars in deferred savings. The following are some tips on funding and managing the assets in your 401k plan.

  1. Take advantage of matching funds from your employer.
    This is money you don’t have to contribute and gives you a significant immediate return. Before your 401k plan money earns the first dollar of interest, you’ve already had a 100% growth if your employer matches you dollar-for-dollar. Even if the match is only 50 cents on the dollar, that’s still an instant 50% growth, GUARANTEED! You can’t get that kind of growth anywhere else
  2. Manage the dollars you contribute to your plan the same as you would any other investment.
    Although 401k plans are sponsored by your employer, they are not guaranteed by them. Do your homework before you invest. Understand the risk you are taking both short and long-term.
  3. Use portfolio rebalancing on consistent basis.
    Make sure your money is well diversified.
  4. Dollar-cost averaging is the best part of this type of investment.
    Because you contribute money each pay period to the plan, you are taking advantage of the fluctuating markets and accumulating more shares of each of the selected portfolios in down markets.
  5. Beware of the long-term tax implications.
    If you accumulate too much money, you may be subject to excise tax. Be aware of the numerous IRS rules and regulations and plan around them.
  6. If you plan to retire before 59 1/2, make sure you understand the distribution rules.
    IRS rule 72t can be a helpful distribution alternative.

The primary focus here is that you, the investor, recognize the opportunities as well as the pitfalls of your 401k plan.

If you are interested in more information and research for your 401k take a look here at Jim’s new 401k Notes.