How to Make the Most of Your 401(k) Plan

Here are some tips to maximize your retirement savings:

Devise an investing plan and stick to it
Create a long-term investment plan—also known as an asset allocation strategy—and choose a mix of low-cost mutual funds. Stay true to your plan even if the market falters. It’ll pay off in the long run.

Be wary of fees for investment advice
Some employers offer investment advice to manage your account. If it’s free, go for it. But be careful about paying a percentage of your portfolio to have someone guide it for you. It’s usually not worth the cost for young investors with limited assets. Many companies offer free online calculators and guidelines to get you started.

Don’t touch your 401(k) before you retire
You may be tempted to dip into your growing pool of money to splurge on a high-def TV or other major purchase. Don’t. You’ll pay extra fees and taxes, and you’ll lose out on the glory of compound returns. Basically, by letting your 401(k) alone, your gains can be reinvested and earn more than you would with a smaller chunk of cash. Left alone, it can grow exponentially year after year. So try to tap into other cash sources before you raid your 401(k).

Think about paying off high-interest debt with 401(k) loans
Wait a minute! We just told you not to tap those funds. But if you’re young and deluged by high-interest credit card debt, it could be worth borrowing against your 401(k) to eliminate those balances. The loan comes from your own funds and you are in essence paying the interest back to yourself. Still, you should only do this if you’re truly in hot water and have no where else to turn.

If you go this route, be careful. In most cases, the loan must be repaid within five years, with the interest rate at prime plus one percent. And if you lose your job or leave your company, you’ll have to repay it quickly—normally within 60 days. Otherwise, the IRS sees it as a withdrawal and will get you for income taxes and early-withdrawal fees. A final caution: you can’t contribute to your 401(k) until the loan is repaid, so you’re stalling any progress you’ve made toward funding your retirement.

Roll over the funds if you leave your job
It may be tempting to ask your company to cut you a check, but it’ll cost you a bundle in taxes and penalties. In most cases, you can leave an old 401(k) account alone for as long as you want, where it will remain with the brokerage firm that administers your account. If your former company kicks you out of the plan, you’ll need a new home for your funds. The best options are to roll the funds into an IRA, or into a 401(k) at your new job. Make sure you talk with your plan administrators—as well as the new firm where you’ll park your money—to be certain you follow the rollover rules and avoid penalties.

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