Participating in a 401(k) or similar retirement plan is a tax-advantaged way to save for retirement. If you have the option of participating in a 401(k) plan, avoid these five common mistakes:
- Not taking full advantage. Too many employees opt out of the plan or don't contribute as much as they can afford. At a minimum, try to set aside enough to receive the full employer-matching contribution.
- Investing too much in company stock. Try not to put all your eggs into one basket when it comes to company stock. Even if the company is doing well now, things can change. If you lose your job, you don't want to lose your retirement savings, too.
If your employer uses company stock for the matching contribution, you may have no choice. But at least you can select other investments for your own contributions.
- Borrowing from your plan. Take a loan from the plan only as a last resort. Remember, these savings are for your retirement, not to fund everyday needs. When you borrow from the plan, you're losing the tax-deferred growth on those funds.
- Withdrawing your savings if you change jobs. It's tempting to cash out your savings if you change jobs. But if you do, you'll owe taxes and probably a penalty. More importantly, you'll lose the future tax-favored growth that you might need in retirement. Instead, talk to your financial advisor about a rollover into an IRA or your new employer's plan.