Now, during the COVID pandemic, is an excellent time to tidy up your 401(k) to ensure it is in tip-top shape to provide you with the highest returns and lowest costs over the long term. If you are contributing to your employer sponsored 401(k), then you’re ahead of the game already. But even if you are, then you want to make sure that you aren’t overlooking any potential pitfalls. Here’s a checklist to optimize your 401(k) during COVID-19:
- Ensure you are enrolled. This sounds like a no-brainer but just because you start a new job doesn’t mean you’re automatically enrolled in your employer’s 401(k). Make sure to check up with your people manager and/or HR department to see how to get enrolled in your 401(k). You may have to wait a year or some specific timeframe before you can opt-in (rules vary by employer) but double-check if you can.
- Contribute up to the employer match. Does your employer offer a matching contribution? If yes, make sure that you are contributing up to that match! For example, let’s say your employer provide a 100% match on 5% of eligible pay. If you contribute 5%, then that is a 100% return on your investment. You don’t get that anywhere else, and so you can’t afford to avoid the free money here.
- Make sure you are invested in the right account. There are two flavors to the 401(k) account: the Traditional and the Roth. In the Traditional, you don’t pay taxes on your contributions but you will when you retire and withdraw funds. In the Roth, you pay taxes today on your contributions but you avoid so when you retire. If you’re young, saving a good amount and have years on your hands to let your money grow, then the Roth could be the best option because you’ll save big on taxes when you retire.
- Minimize your investing costs. If you are already investing in a set of mutual funds, double check and make sure that you aren’t overpaying. Each mutual fund comes with an expense ration, which the annual amount taken out of your assets to pay administrative costs. If your plan offers any index mutual funds, then switch over to those because the fees are much lower. At a bare minimum in your plan, there’s most likely a S&P 500 index mutual fund available in your plan. To keep things simple, you could invest all in that fund and benefit from getting instant diversification from the top 500 American companies.
- Sign up for your plan’s annual increase program. Your employer may offer an annual increase program where you can sign up to automatically increase your contributions. If your plan rules allow, you may elect an increase date and percentage when you enroll. For example, let’s say you are contributing 5% today to meet your company match (see step 2 example). You sign up for the annual increase program and you elect to contribute at least 2% more next year (so that you are contributing 7%) starting next year.
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