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Are you making these big 401(k) 403(b) mistakes?

The terms 401(k) and 403(b) are thrown around often, and most people have no idea what that means. It is simply a retirement savings plan that is sponsored by an employer with the terminology derived from the IRS tax code. Most organizations have replaced their pension plans with the 401(k)/403(b) plans and provides some sort of matching contribution. Here are some of the biggest mistakes that we make when it comes to 401(k)/403(b):
1) Not contributing at all:
Forbes reports that 68% of Americans do not contribute to any Employer Sponsored Plans. This may be because they are not offered a plan or they decide to not be a part of it.
If it is the former reason, you are not at fault. Even then, you need to invest in an IRA or even better, in a Roth IRA.
If you are offered an Employer Sponsored Plan, by not contributing, you are throwing money away. Most companies offer a 3-4% match either on a 1:1 ratio or on a 2:1 ratio. This accumulates to hundreds of thousands of dollars by the time you retire.
2) Cashing Out Early:
When life happens and an emergency strikes, it’s natural to eye the big amount invested in your retirement fund. Having an emergency fund is what helps at this point. By cashing out early, you are not only destroying your retirement, but you end up paying additional taxes and penalties, which is usually 10%.
The cash out usually happens when a person changes his/her job. It is prudent to take money out of the old employer, but instead of cashing out, it should be invested in an IRA or a Roth IRA. You need to seek guidance, if you are in this category.
3) Taking a loan against 401(k)/403(b):
The usual explanation for taking a loan against your retirement fund is that it is one’s own money and one plans to repay it over time. However, financial coaches are against it for variety of reasons. Once a loan is taken, you have a set number of days to start repaying them. If you cannot do it for any reason, it will be considered a distribution and you will have to pay additional taxes and penalty of ~10%.
If you lose your job at the time of a pending loan on your 401(k), you need to immediately pay it back or it will be considered as a hardship withdrawal, leading to taxes and penalties.
The biggest setback is in your retirement growth as the loaned amount will miss out on the compound interest – the eighth wonder of the world.
4) Settling with Default Contribution:
Dave Ramsey recommends that we save 15% of our income for retirement. However, most companies’ default contribution level is at 4-5%, which is the maximum for company match. If not careful, we will miss out on contributing more and losing the compound interest that we could have earned during the working years.
5) Avoiding Risk Completely:
Many employees do not have financial knowledge and might be scared of market behavior. So,the natural tendency is to invest in bonds and treasury funds. However, this may not be the right strategy, depending on your age. The best recommendation is to contact a financial coach and get guidance.
6) Failing to Research Investment Funds:
Again, due to lack of financial knowledge, many employees will choose funds recommended by their friends and family members. Even though this is better than not contributing at all, the chosen funds may not be the right one for you depending on your age and family situation. In addition, many companies entertain Target Retirement Funds, which in reality is a blended fund. It is always better to research each fund thoroughly before investing your hard earned money. Your Coaches at Mayanah are certified by Dave Ramsey to provide solid financial advice.
7) Not making catch up contribution
Depending on your financial status, you may need to accelerate your contribution after the age of 50. The good news is that IRS allows for catch up contribution. However, if you are not careful and aware, you will miss out on these added perks.
At any stage, it is better to have a financial coach to guide you through and Mayanah Coaches are here to help you succeed !!
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