Your 401(k) is growing, but do you actually know if it’s working as hard as it should be? A lot of people set it and forget it, only to realize later that they missed out on better returns, lower fees, or smarter tax strategies. Asking the right questions now can help you strive to maximize your savings and avoid regrets when retirement rolls around.
1. Am I Contributing Enough to Get the Full Employer Match?
If your employer offers a 401(k) match and you’re not contributing enough to get every last dollar of it, you’re basically turning down free money. Most companies match a percentage of your salary, but only up to a certain limit—so if you’re contributing too little, you’re leaving cash on the table.
The first step is to check your plan’s match structure. Is it dollar-for-dollar up to 5%? Fifty cents on the dollar up to 6%? Once you know, adjust your contributions to take full advantage. You should also check if your contributions automatically increase each year as IRS limits go up—some plans do this by default, while others require you to opt in. A small tweak now could mean thousands more in your retirement account down the road.
2. Are My Investments Properly Diversified?
Your 401(k) offers a variety of investment options, but having too many of one type can expose you to unnecessary risk. A solid strategy involves a mix of stocks, bonds, and funds, balancing risk and growth potential. If you’re overly concentrated in one area—like stocks—market fluctuations can hit harder, while too much cash may stunt your growth.
It’s important to review your portfolio periodically to make sure it matches your goals and comfort with risk. And remember, rebalancing helps you stay aligned with your retirement timeline, keeping your investments in check as the market evolves.
3.What Are the Fees Associated with My 401(k)?
Fees might be the silent killer of your 401(k) returns. Many plans have management fees, administrative costs, and expense ratios that chip away at your balance over time. You may not notice it immediately, but the impact adds up—especially when compounded over years.
It’s essential to understand exactly what fees you’re paying. Are they in line with what similar plans charge? Some funds are more expensive than others, and those extra costs might not be worth it if there are equally solid, lower-cost options available. Don’t be afraid to ask your plan provider about other fund choices that could save you money without sacrificing returns.
4. Am I on Track Towards My Retirement Goals?
Your 401(k) should be working toward your retirement goals, not just sitting there. To make sure you’re on track, use retirement calculators or better yet, talk to a financial advisor. They can help you assess whether your contributions align with your timeline and income needs, and if you’re falling short, they’ll suggest ways to bridge the gap before retirement.
5. Should I Consider Roth vs. Traditional 401(k) Contributions?
Many 401(k) plans offer both Roth and traditional options, but which one is best for you depends on your current tax situation and future expectations. With a traditional 401(k), you get tax savings upfront since your contributions are made pre-tax, but you’ll pay taxes when you withdraw in retirement. The Roth 401(k) differs in that it is after-tax contributions, meaning you pay taxes now but enjoy tax-free withdrawals later.
If you’re unsure about what your current 401(k) is structured as or how it can be optimally allocated, diversifying your contributions between both types can give you flexibility in retirement. By having both options, you can hedge against future tax changes, making it easier to manage withdrawals when you retire. It’s a smart move to chat with a financial advisor to figure out the right balance for your situation.
6. What Happens to My 401(k) If I Change Jobs?
When you switch jobs, your 401(k) doesn’t just disappear—it’s up to you to decide what to do with it. You can roll it over into your new employer’s plan, leave it where it is, or transfer it to an IRA. Just be sure to check the vesting schedule, as it’ll tell you how much of your employer match you actually get to keep. If you’re rolling it over, make sure you do it the right way to avoid unnecessary taxes or penalties. It’s all about keeping your money working for you, no matter where you’re employed.
7. When and How Can I Start Withdrawing from My 401(k)?
You can start making penalty-free withdrawals from your 401(k) once you reach age 59½ (or 55, if you lose or leave your job before or after you turn 55). If you take money out before then, expect to pay a 10% early withdrawal penalty in addition to regular taxes.
Once you hit age 73, you’ll need to start taking required minimum distributions (RMDs) from your 401(k) to avoid penalties—so don’t forget about them!
When it comes to withdrawing, it’s all about strategy. If you want to minimize taxes and stretch your income in retirement, consider different options, such as withdrawing from both Roth and traditional accounts or using a 4% withdrawal rule. Learn more about RMDs here.
Professional 401(k) and Retirement Planning
Your 401(k) can be a powerful tool for optimized retirement planning, but only if you’re actively managing it. Contact the professionals at Dunnigan Financial today to learn more about how we can help you pursue your financial goals.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.