It's important to make an effort to save for retirement as well as you can. The more money you're able to sock away for your senior years, the less financial stress your future self might experience.
But if you're fairly new to saving for retirement, you might make some big mistakes in the new year. Here are three, in particular, to avoid.
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1. Using a regular brokerage with no tax breaks
You may be inclined to open a regular brokerage account and keep your retirement savings there. That way, you'll get complete flexibility with your money. If you need to tap your long-term savings in your 30s or 40s to cover an unplanned expense, you'll have that option without having to worry about facing penalties.
IRAs and 401(k) plans work differently. These retirement accounts impose penalties for taking withdrawals prior to age 59 1/2, unless you qualify for a limited exception. However, IRAs and 401(k)s also have one huge advantage over regular brokerage accounts -- they come loaded with tax breaks.
With a traditional IRA or 401(k), your contributions are tax-free, thereby allowing you to shield some income from the IRS. Plus, with a regular brokerage account, you could face yearly capital gains taxes. With a traditional IRA or 401(k), gains are tax-deferred until you take withdrawals.
Furthermore, you might think the fact that you can't access your money penalty-free in an IRA or 401(k) until age 59 1/2 is a bad thing. But actually, it's a good thing, to some degree.
You don't want the temptation to tap your nest egg every time a new expense comes up. So if it takes the threat of losing a large chunk of your savings to get you to leave that money alone and reserve it for retirement, that alone makes an IRA or 401(k) worth funding.
2. Not snagging your employer 401(k) match
You may be inclined to save for retirement in an IRA instead of a 401(k) if you're not a fan of your company's plan. And that may not be such a bad idea.
With an IRA, you generally get more investment choices. That could result in a portfolio you're more comfortable with and fewer investment fees.
But if your employer's 401(k) comes with a matching incentive, then it pays to contribute enough to that account to claim that match in full. From there, if you want to focus on funding an IRA instead, so be it. But don't give up free money for your retirement when it's available to you.
If you're worried that investing in your employer's 401(k) will mean getting pounded with fees, look at putting your balance into low-cost index funds. Those are generally made available to 401(k) savers.
3. Not being mindful of your 401(k)'s vesting schedule
You may decide that 2024 is the year you'll leave your job and pursue a new one. But if you've been saving in your company's 401(k) and getting a match, before you make a move, see what your employer's vesting schedule looks like. Some companies set rules that require you to remain employed for a certain period of time before gaining access to your employer match in full -- or at all.
Let's say your company's policy is that you must remain employed for two full years to claim your 401(k) match and that leaving your job prior to two years means forgoing your match entirely. If you won't hit the two-year employment mark till April of 2024, then getting a new job in February or March could mean giving up a pile of money. In that scenario, holding off for a month or two could make a lot of sense.
It's a great thing to be committed to saving for retirement. But do your best to avoid these pitfalls because they could really set you back.
