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15 Tips to Make the Most of Your 401(k)

By Christy Bieber - Sep 28, 2022 at 7:00AM
An egg with 401(k) written on it on top of a pile of cash.

15 Tips to Make the Most of Your 401(k)

A 401(k) can be a retirement savings powerhouse if you use it right

If your employer offers you a 401(k), it can be a great way to save for retirement.

Investing in it is easy since you can have money withdrawn from your paychecks and deposited directly into it. And there are some other important benefits that could be available as well, depending on your company's plan.

Since this is such a great account to invest for your future, you'll want to make the most of it. Here are 15 ways to do that.

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1. Open your account as soon as you start working

If you want to maximize the value you get from your 401(k), you should sign up for it and start contributing right away. Do this with your very first job if you can. Or if it's too late for that, do it with your current or future employers as soon as you become eligible.

The sooner you start contributing to your 401(k), the sooner your investment account balance can begin growing. Once you start investing, your money earns returns that are reinvested. This compound growth makes building wealth much faster and easier.

ALSO READ: This Was the Average 401(k) Balance Last Quarter. How Does Yours Compare?

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A Roth IRA road sign.

2. Research what types of 401(k)s your workplace offers

For a long time, most employers offered only a traditional 401(k). This provides an up-front deduction for contributions. However, a growing number of employers are now offering Roth 401(k) accounts.

Find out what types of 401(k) plans you can sign up for to see if your company is one of them. If you have a choice of which 401(k) to use, you'll want to know that so you can make a wise decision.

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An alarm clock resting atop little wooden blocks that spell out TAX and sitting on a desk with books and a calculator.

3. Choose the right kind of 401(k)

If you have access to both a traditional and a Roth 401(k), you'll want to think carefully about which is best. A Roth doesn't provide an up-front tax break, but you can withdraw money tax free as a retiree. A traditional 401(k), on the other hand, allows pre-tax contributions but withdrawals are taxed.

If you think your tax bracket will be lower later, you should claim the up-front deduction to maximize tax savings. But if you expect a higher tax rate later, a Roth 401(k) may be the best choice.

ALSO READ: Traditional 401(k) vs. Roth 401(k): What's Best for You?

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A 401k statement showing a match.

4. Understand the rules for your employer match

One of the best things about a 401(k) is that many companies match contributions you make to it. But there are different rules for how much is matched and what you must contribute to max it out.

You don't want to pass up this free money, so be sure you know and follow the rules to get all the matching funds available.

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Piggy bank with dollar bills sticking out the top.

5. Be strategic in deciding how much to contribute

For many people, it makes sense to contribute as much as possible to a 401(k). This account has higher contribution limits than others such as a Roth or traditional IRA, and there aren't income limits for who can invest in a 401(k).

But, in some cases, you may want to mix up your money. You may opt for an IRA or Roth IRA for some of your retirement funds rather than putting everything you're saving for your later years in your 401(k).

Think carefully about the pros and cons of all the retirement plans you can access to decide how much to contribute to your workplace plan.

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6. Contribute a percentage of your salary rather than a set amount

If you have a choice between contributing a percentage of your salary or a set amount of money each paycheck, always opt for a percentage of salary. If you do that, your contribution amount will go up automatically as your income increases. You won't need to go back and change things to invest more when you earn more.

ALSO READ: Want $1 Million by Retirement? Here's How Much You Should Invest Today

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7. Increase your contributions regularly

You should ideally contribute around 15% of your income to a retirement plan, although the specific amount you need to invest depends on your goals and your retirement timeline.

Most people are investing less than that, though. If you aren't putting enough into your 401(k), set a regular schedule for increasing your contribution amount. For example, you could contribute an additional 1% of your income every six months. This would allow you time to ease into saving more.

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The words Tax Credit written on paper.

8. See if you qualify for the Saver's Credit

The Saver's Credit is a credit some people can claim for making retirement account contributions. It could be worth up to $2,000.

You should find out if you are eligible for it based on income. If you are, be sure to invest the necessary amount in your 401(k) to get $2,000 in retirement savings subsidies from Uncle Sam.

ALSO READ: IRS Is Rewarding Retirement Savers With Up to $2,000 -- Are You Eligible?

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Businessperson with illustration of asset allocation.

9. Explore all of your investment options

Most 401(k) plans don't have a lot of investment options. You may only have access to around a dozen or fewer funds. But you'll still want to look at all of the different assets you can invest in. Research each one to find out if it's a good fit for your portfolio and financial goals.

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Blocks spelling out the word fees and surrounded by percentage signs.

10. Pay attention to 401(k) fees

Investing for retirement is done over the long term. As a result, even small fees can add up and reduce your account balance by tens of thousands of dollars. You'll want to pay careful attention to administrative fees and investment expenses in your 401(k). By keeping them to a minimum, you can avoid losing hard-earned cash.

If it turns out your 401(k) charges a high management fee or offers only investments with a high expense ratio, you may want to invest only enough to earn your match and put your other retirement dollars elsewhere.

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A pie chart showing asset allocation diversification.

11. Build a diversified portfolio

You can't afford to put all your eggs in one basket when saving for retirement. So, you'll want to be sure you build a diversified portfolio. Choose from a good mix of assets that your 401(k) offers so you can limit your exposure to risk while maximizing your chances of earning generous returns.

ALSO READ: Understanding Portfolio Diversification

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Office workers surround retiree at retirement party.

12. Choose the right target if you opt for a target date fund

Target date funds are very common in 401(k) plans. These are funds that allocate your assets based on your retirement timeline. This way, you don't have to worry about whether you have the right investment mix.

If you choose to buy a target date fund, be aware they can sometimes come with higher fees. And make sure you are accurate and realistic about choosing your target retirement date.

While you may want to work until 70, chances are you won't be able to do so. So, be careful about setting your retirement date further away than is feasible.

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A magnifying glass being held over a balance sheet.

13. Rebalance your portfolio regularly

If you don't have a target date fund, you'll need to make changes to your investments over time. This is important as your risk tolerance changes.

If some investments outperform others, your portfolio could also become unbalanced. Be sure to take a look at your 401(k) investments around once a year to make sure this doesn't happen.

ALSO READ: It Doesn't Matter How You Rebalance, Just That You Do

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14. Track your account's performance

It's a good idea to keep tabs on how your 401(k) is performing. This will help you determine if you need to make changes to your investments. It can also enable you to monitor whether you're on track to hit your retirement goals. If you are falling short, you can make changes to save more before it is too late.

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Person using calculator on desk.

15. Consider rolling over your 401(k) when you leave your job

If you leave your employer, you'll have to decide what to do with a 401(k). You may be able to leave it invested. Or you could roll it over into your new company's 401(k) or into an IRA.

Think carefully about your options. Rolling it over into an IRA would give you more investment choices, while moving it into your employer's new plan can help you keep tabs on where all your money is.

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Making the most of your 401(k) is worth the effort

You want to enjoy retirement, not spend your later years worrying about your money. A big 401(k) can enable you to do that. So, it's worth taking the time to implement these 15 tips and take full advantage of this valuable retirement savings plan.

The Motley Fool has a disclosure policy.

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