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What Not To Do With Your 401k
There are so many tips out there concerning what to do with your 401k, we’d like to tell you what not to do with your 401k. This especially holds true if your 401k is your primary retirement investment. Learning what not to do with your 401k can help you not only protect your wealth, it can help you protect your future. Tips on what not to do with your 401k can be applied to an IRA, too.
1. Resist the temptation to borrow from your plan. Just don’t do it. It is simply a loan and has adverse effects on your investments. According to an article from SmartMoney.com on Dec 11, 2009, borrowing from your plan can have the following effects: 1) It reduces the capital your plan has to compound; this can reduce the amount you have to withdraw from after you retire, in a big way. 2) If you leave your employer before you pay back the loan you can incur several types of penalties including reduced time to pay back the loan and will be taxed on any amount you do not pay back in time.
2. Don’t cheat yourself with your contribution. You have the option to contribute a percentage of your check to your plan. Take it as high as you can and don’t just do the minimum that your employer will match. Minimum contributions to your plan should range from 9%-12% (12%-15%) if you are in a higher income bracket.
3. Chasing Stocks. This provides the tempting opportunity to chase hot stocks and try to beat the market. Resist this temptation, too. Pick a plan and stick with it. Then determine a time with your broker to take a look at it and rebalance. Gains in the 'market' are what add value to your 401k, not gains in a single stock.
4. Investing is risking. No matter how conservative an investor you are, you should have some risk in your portfolio. Your goal as a long term investor is to balance your portfolio. This means, invest in everything: short-term money markets are good for stability but have less growth potential so putting some of that money in stocks allows you to take advantage of that growth potential and protect your portfolio from inflation. Investing in precious metals (gold, silver) will also protect you from the falling value of a dollar. Inflation will reduce the value of your investments.
5. Don’t Cash out. If you leave your employer, don’t cash out unless you meet the age requirements (59 1/2). Cashing out may seem attractive at the time, but it is a big huge DON’T on the what not to do with your 401k list. You will be taxed for premature distribution. Instead, roll it over to your new employers 401k or into an IRA account.
6. Don’t try to ‘day trade’. It’s gambling, even for those who do it for a living and you may as well take your earnings to Vegas. By frequently transferring money in and out of the market you risk missing growth opportunities and you increase the expenses of your fund; both eat away at your profits for retirement. Talk to your agent about good times to rebalance the portfolio, otherwise, leave it alone and let it do its work.
The main thing to remember about any type of long term investment is to take the emotional aspect out of it. Younger investors can afford to be more aggressive than an older investor as they have more time to leave money in the market. Whatever investment type you and your broker decide on, consider the money that you contribute to your 401k or IRA as ‘non-existent’ so you won’t be tempted to borrow from it or move the money around too much trying to predict the market.
Posted on: Dec. 16, 2009