5 Key 401(k) Rules to Live By

You might be surprised at how much you can save for retirement with a 401(k) account. Following these critical rules can help you maximize your future income and financial security.

Selena Maranjian
Selena Maranjian
Feb 23, 2017 at 6:46PM
Investment Planning

As pensions are becoming rarer and rarer, 401(k) accounts are more widespread than ever in American workplaces. Better still, 401(k) management giant Fidelity Investments reported that as of the end of 2016, 401(k) balances hit a record average of $92,500. If that looks like your 401(k) balance, you'll still want to do more.

A balance of $92,500 is a good start, but it won't get you far in retirement. So aim to put some critical 401(k) rules into practice to turbocharge your retirement savings. Here are five valuable rules to know.

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Rule No. 1: Grab all available matching dollars

First off, be sure to grab any available matching funds from your employer. A common employer match is 50% of the contributions you make up to 6% of your salary. Thus, if you earn $75,000 and contribute 6% of your salary, or $4,500, your employer will chip in an additional 3%, or $2,250. That's $2,250 of free money -- a guaranteed 50% return on your investment. Even if you don't contribute as much as you're allowed, contribute enough to get all the free money you can from your employer.

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Rule No. 2: Save aggressively for maximum results

Speaking of maximum contributions, 401(k) accounts can receive many more dollars each year than IRAs can. The contribution limit for IRAs in both 2016 and 2017 is $5,500, plus an additional $1,000 "catch-up" contribution for those aged 50 or older. A 401(k) offers a contribution limit in both years of $18,000 for most people, plus an additional $6,000 for those 50 or older, giving older savers a hefty annual maximum of $24,000. For as comfortable a retirement as possible, it's smart to sock away as much as you can, as soon as you can. The following table shows how effective it is to make big annual contributions and to do so for as many years as possible.

Growing at 8% For:

$5,000 Invested Annually

$10,000 Invested Annually

$15,000 Invested Annually

15 years




20 years




25 years



$1.2 million

30 years


$1.2 million

$1.8 million

Data source: calculations by author.

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Rule No. 3: Consider a Roth 401(k)

Just as there are two main kinds of IRAs -- traditional and Roth -- many companies now offer their workers both traditional and Roth 401(k)s. With a traditional IRA and 401(k), you contribute pre-tax money that reduces your taxable income by the amount of the contribution and thereby lets you avoid being taxed on that sum in the year of your contribution. (When you ultimately withdraw the money in retirement, it will be taxed as ordinary income to you.) With a Roth IRA and 401(k), you contribute post-tax money that doesn't deliver any upfront tax break. But you eventually get a big tax break when you withdraw from the account in retirement – because if you followed the rules, you get to take all the money out of the account tax-free. Revisit the table above and imagine having much of your sizable nest egg be available to you tax-free.

Rule No. 4: Seek low-fee investments in your account

You may not realize it, but 401(k) plans typically charge fees -- and sometimes hefty ones. That's a big problem, because while you may be saving aggressively and investing through your 401(k), if you're being charged sizable fees, you're fighting against a headwind. (Some plans charge significant fees even for index funds that you can invest in elsewhere for a pittance.) Fortunately, fees have been falling in recent years, in part due to lawsuits brought about against some employers. The folks at Vanguard have illustrated the devastating power of fees, noting that investors in a plan that charged 0.25% a year could accumulate 20% more money over 40 years than they could in a plan that charged 1.25%. You can look up ratings for many companies' 401(k) plans at www.brightscope.com -- where it rates them on fees, among other things. If your company's plan only offers high-fee investment choices, ask the plan administrator for lower-fee options.

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Rule No. 5: Don't cash out or borrow from your 401(k)

According to Fidelity Investments, which administers millions of workers' 401(k) accounts, about one in three workers younger than age 59 1/2 cashed out his or her account when changing jobs. Don't be one of those people. Sure, you may have only worked at a given company for three years and may not have much in your account, but if you remove even $20,000 that could have kept growing for you for another 25 years, you could lose about $137,000 that would have come in handy in retirement (assuming an 8% average annual growth rate). Similarly, don't borrow from a 401(k) plan, either, unless it's an emergency and you really have no better option. That's another way of stealing from your financial future.

Don't leave your retirement up to chance. The average Social Security retirement benefit is only about $16,000 per year, so you'll probably want to augment that. Follow these rules to make the most of your 401(k), and it could make a big difference.