Now that tax time is here, many Americans look for ways to reduce how much they pay. A tax-advantaged retirement savings account, like a 401(k), is a great way to boost savings and lower your tax bill.
A growing number of companies automatically enroll employees in their 401(k) or similar retirement savings plan. In fact, nearly half of all 401(k) plans automatically enroll employees. But some do more than just enroll and get you started down a retirement savings path. They also automatically increase the amount you contribute each year.
If you're part of the "auto-generation," these tips will help you make the most of your company's automatic features:
1. Know your defaults. Become familiar with the default savings rate -- the amount your 401(k) automatically deducts -- and investment selection your company has chosen for you. Ask yourself if you're saving enough. The most common default savings rate is 3%, which may not be enough to provide the replacement income you'll need when you retire. And take the time to read the prospectus describing your default savings investment, and those of the other investment options that are available.
2. Take full advantage of an employer match. Most automatic plans set a default savings rate that ensures you receive the full match if your employer offers one. If your rate doesn't get you the full employer match, increase it to make sure you do get the full match.
3. Go up the "savings escalator." If your plan offers an automatic increase in the savings rate, stick with it. For instance, some plans will increase your rate by 1% every year. An annual increase in how much you save in your 401(k) can be a painless way to increase your savings. If your plan doesn't offer automatic increases, be disciplined and do it yourself.
4. Open and read your account statements. Your employer must give you an account statement at least once every quarter -- and plan providers often send you statements each month. You may also be able to access account information online. Make a habit of looking at your statement each time you get it, and ask questions about anything you don't understand.
5. Don't opt out -- or cash out. Significant tax advantages and often an employer match come with your plan -- important benefits you lose if you don't stay in the plan. Even worse, if you opt out of your 401(k), you may not get be able to get back in for a while, which can put you way behind on your savings. If you leave your company, resist the urge to cash out even a part of your savings for something you think you need. Retirement savings is just that -- for your retirement.
For more about saving for retirement, visit www.finra.org.
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