Avoid 401k Contribution Mistakes: Failure to Participate and Contribute 401k
If you are an employee and your employer has established a 401k plan, it is a mistake to not participate and not contribute as much as possible. When you put your money investing in a 401k, you wish to get your money’s deserving for your investment. Your main goal is by the time your retirement come so that you can retire comfortably. Nevertheless, there are common mistakes and misunderstanding that some 401k investors like you make that have them not to get all of the benefits and profits from their 401k retirement investment plan.
Even if your employer does not have a matching contribution, your contribution is tax deductible (up to certain limits), grows tax-deferred, and probably can be invested in a variety of attractive financial products. If you do not participate, you pay income tax on the money you would have contributed to the plan. You lose a valuable benefit that you may not be able to duplicate.
A 401k defined contributions plan can be initiated by the employer, employee or by both. It is then depend on the individual to decide where to invest the amount in whichever way he/she wishes. But, commonly people make certain mistakes while investing in this type of a plan. Failure to match your employer contribution and failure to participate in such program is one of the biggest mistakes in retirement planning.
Forgoing to match company contribution is one of most common mistakes the investor did. If your employer matches your contributions share $0.25 on the $1 up to 6 percent, then you should contribute at least 6 percent. By doing so, you will earn a guaranteed 25 percent return. Better yet, defer a bigger percentage and you get extra tax advantages during your work with your employer and thereafter.
If your employer matches any portion of your contribution, make sure you contribute the maximum amount to get the full match. For example, suppose your employer matches 100% of your contribution to a maximum of 5%. You should contribute 5% of your salary to qualify for the maximum match. You should think of a match as a gift, which is probably well deserved on your part as an employee. Remember that you are always 100% vested in your contribution and its growth. If you leave, you can always roll your money into an IRA and continue to defer the growth until age 70 1/2. For example, suppose you have the ability to contribute $5,000 annually to a plan which will grow tax-deferred at a hypothetical 8% interest rate until you are age 65. The future value of cost of waiting (after counting the interest rate and inflation rate) will cost you dearly.
For a young employee, the future cost of waiting to start a savings program by five years (from age 25 to 30) is $408,699 ($1,295,283 - $861,584) = $433,699 - $25,000, which represents additional contributions of $5000 per year for five years.