I'm a Financial Advisor: People Always Regret Doing These 5 Things With Their 401(k)

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15 hours ago

If you've got a 401(k) through your employer, you may be in 'set it and forget it' mode. It's easy. You contribute your part, you choose your funds and you never think about it again. When you do have to visit it, it's usually an emergency and you make desperate decisions on your own.
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For this reason, many people are not doing as well with their employer-sponsored retirement plan as they could be. To help you avoid that pitfall, we spoke to financial experts who focus on 401(k) plans in their line of work. They've offered us these five things people always regret doing with their retirement fund.
Not Contributing More
You hear it all the time, right? People don't lie on their deathbeds thinking, 'I wish I didn't have all those adventures.' Or 'I wish I hadn't spent all that quality time with my family.' You rarely regret doing those things. Instead, you regret not doing the things. The same philosophy applies to your money.
'The number one regret people have regarding their 401(k) is not contributing more and earlier to their 401(k) [plan]s. I've been doing this for over 15 years and I've never once heard a client say, 'Man, I wish I didn't have all that money saved in my 401(k).' I have, however, heard, 'I just wish I started earlier,'' said David Silversmith, certified public accountant (CPA) and certified financial planner (CFP) at the Eisner Advisory Group LLC.
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Remember, the more you contribute, the more interest you'll earn and the more interest you earn, the more interest you'll earn. It's a compounding financial equation that can make you very wealthy by the time you retire.
According to Bob Wood, Ph.D., professor of finance at the University of South Alabama, you should at the very least be contributing what your employer will match. 'Foregoing a 100% return on those funds is inexcusable,' he explained.
But, as Wood said, even that is not enough. 'An employee should contribute up to the legal maximum contribution,' he added.
In short, cut corners in other places if you have to, but do everything you can to max out your 401(k) contribution.
Withdrawing Early
Emergencies happen. We get it. Virtually everyone has been there. But you cannot think of your 401(k) as a savings account.
'Withdrawals from a traditional 401(k) are taxable income. Withdrawals before the age of 59 and a half are subject to an additional 10% penalty. The IRS gives a list of exceptions to this penalty. If one makes an early distribution without meeting one of the exceptions, the individual could be subject to a hefty tax bill,' Silversmith said.
So, unless your emergency falls under one of these exceptions, you'll pay way more than you'll want to by withdrawing from your fund.
And even if it is one of those emergencies, think long and hard before making that withdrawal. You'll be losing the chance to make money on your money. In many cases, you may even be better off taking out a small loan rather than withdrawing from your 401(k).
Not Consulting With Your CPA
Whatever you decide to do, make sure you consult your CPA or financial advisor. Talking to someone who knows finance, whom you trust, can mean the difference between losing thousands of dollars and making thousands of dollars.
'Another common regret people make is that they do not notify their CPA or financial advisor when they conduct major financial transactions in their 401(k) [plan]s. The rules around 401(k) plans and IRAs are complex. Not checking first with a CPA or financial advisor can result in costly mistakes and being assessed substantial tax and financial penalties,' Silversmith explained.
So, before you make any big moves with your 401(k), pick up the phone. You'll be glad you did.
Not Paying Attention to Your Funds
Back to that 'set it and forget it' mentality. For whatever reason, people pick their funds when they sign up through their employer. But then, they never revisit that decision.
Over the years, your employer may add new funds. Old funds may not match your interests. Or your lifestyle may just have changed.
'The number three regret people have is not periodically monitoring their plan's fund menu to see if there are new funds added that may be more cost-effective. Older plans often still include costly mutual funds. As the investor, it is in your best interest to research every fund available to you,' said Amy Zamikovsky, Juris Doctorate, CFP and certified private wealth advisor (CPWA).
Make sure that you revisit your financial plan and your funds every couple of years as a practice. This will help you build your wealth in a way that makes more sense. So you won't get left behind while others are maximizing their potential for growth.
'A few important things investors should be looking out for when choosing funds inside their 401(k) are: the fund's historical performance as compared to benchmarks, market cap, expense ratio, risk profile — such as standard deviation, beta and Sharpe ratio, whether the fund is active or passive, Morningstar rating and the fund manager's background and tenure,' Zamikovsky added.
Not Rolling Over
Finally, one of the biggest regrets people have about their 401(k) plans is not even realizing their growth capabilities once they reach a certain age.
'At 59.5, many 401(k) plans provide for what's called an in-service rollover. This allows the employee to roll the existing funds in their 401(k) into a rollover IRA managed by a dedicated financial advisor. Once someone becomes an accredited investor (earning $200,000 or more per year or $300,000 or more if married or having a net worth of more than $1 million, excluding their primary residence), they legally gain access to far more investment opportunities than the average retail investor,' Zamikovsky said.
She made the point that you could be earning much more money, even if you have to pay a bit more to level up. You'll end up coming out ahead in the end. Just having this kind of knowledge can be incredibly helpful when you reach the age or price point to start taking advantage of these extra benefits.
'Various alternative investments can offer investors enhanced portfolio diversification, potential inflation protection and access to strategies that are not correlated with public markets, which can help reduce portfolio volatility. The problem is that most investors who transition into accredited status are unaware of their new status and the long-term financial benefits it can unlock for them,' she added.
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This article originally appeared on GOBankingRates.com: I'm a Financial Advisor: People Always Regret Doing These 5 Things With Their 401(k)
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