The end of the year is fast approaching, so you’ve only got a few days left
before the window slams shut on your ability to make changes to your
401(k) for 2012.
The five tips below will help you make the most of that limited time,
and put you on track in your efforts to make your golden years as
comfortable as possible.
1. Make sure you’re getting your free money.
Many employers will provide matching money based on the amount you
contribute to your 401(k). Check your employer’s policy on matches and
make sure you’re socking away enough to capture every single dime the
boss will give you. If you hurry, you may even still have time to adjust
your contribution and get the most from your 2012 match.
Why this matters: When combined with the potential tax savings, a 401(k)
instantly. There are very few other investments that give you the
opportunity to get that large an instant return, and even fewer that
provide that type of return with such certainty.
2. Diversify out of your employer’s stock.
You may work for the best company on Earth, but one of the most dangerous
you may find yourself out of work and with a substantially diminished
nest egg at the same time. Your own contributions should go into other
options in the plan, and if your match comes in the form of company
stock, check the rules on when you can sell it and shift your money into
a different fund.
Why this matters: Remember Enron? It went from
full-fledged Wall Street darling to becoming completely worthless as
both an investment and an employer. And it really didn’t take long for
it to move from the list of “Best Companies to Work For” to the list
“Biggest Collapses of the Century.”
3. Make a plan to pay off any loans against your account.
If you’ve taken out a 401(k) loan, make it a priority to pay it back
quickly. The convenience of being able to borrow money with no credit
check and the pleasure of paying yourself back rather than
sending your money to some faceless bank make 401(k) loans tempting. But
the gotchas can be downright ugly if you’re unable to repay back the
loan on schedule — especially if you lose your job.
Why this matters: If you lose or walk away from your
job, you could be required to pay the loan back in full within 90 days.
If you can’t, the outstanding balance is treated as a distribution. That
means you’ll get socked with taxes at your ordinary income tax rate and pay
a 10% penalty on top of that if you’re under age 59½. That’s an ugly
outcome, especially since the people facing it are often in a tenuous
financial position to start with.
4. Try to invest more.
Most employees are allowed to invest up to $17,000 in their 401(k) plans
in 2012, and those ages 50 or higher can contribute an additional
$5,500 in catch-up money, as well. (In 2013, the general limit rises to
$17,500, though the catch-up limit stays at $5,500.) All else being
equal, the more you put away with a decent allocation plan, the better
off you will be in retirement, even if your investing returns wind up being somewhat lousy.
Why this matters: The biggest benefit of maxing out
your retirement savings plans is the long-term financial health you get
from building a decent nest egg. In addition, if your 401(k)
5. Take your Required Minimum Distribution, if you need to.
Once you reach age 70½ and are retired, you must start taking money out of your 401(k),
even if you don’t need to spend it to cover your lifestyle. There are
special rules for the year of your first mandatory distribution, but for
every year after that, you have to take money out of your account by
Dec. 31 of each year.
Why this matters: If you don’t, Uncle Sam will tax you
at a rate equal to 50 percent of the amount you should have taken out
but didn’t. That’s way too much money to lose for simply forgetting to
move your money from one pocket to another.