4 Ways to Maximize Your 401(k) - Adviser Investments

4 Ways to Maximize Your 401(k)

January 24, 2022

401(k) plans are common these days—and if you’re contributing 10% to 20% of your paycheck, you’re ahead of the pack. But while you may already have the basics down pat, taking a deep dive into the mechanics of 401(k)s can unlock one of the most powerful financial planning tools at your disposal. Here are some tips to get started:

  1. Expand your investment options. Compared to a brokerage account or IRA, your investment options with a 401(k) are typically limited to a small list of mutual funds or exchange-traded funds (ETFs). But that list often changes from year to year as employers add or remove funds, so it’s worth doing an annual review to see if you’ve got better options for your investments needs. More significantly, with some plans it’s possible to add a brokerage link inside of your 401(k), opening up a far wider investment universe.  (Contact your portfolio team for more information if your plan offers a brokerage link and you’d like some suggestions.)
  2. Consider a Roth 401(k). More and more 401(k) plans offer a Roth option, but only about 25% of 401(k) savers are using one. We think they’re missing out. A Roth 401(k) has all the advantages of a Roth IRA, with one big difference—there are no income phaseouts. By splitting 401(k) contributions between a Roth 401(k) and a traditional 401(k), high earners can get tax benefits now (by deducting traditional 401(k) contributions) and later (with tax-free distributions of your Roth 401(k) when you retire).
  3. Know your plan’s vesting requirements. Any contributions you make to your 401(k) vest immediately. That money is yours even if you leave the company the next day. Contributions by your employer are often subject to a either a cliff or graded vesting schedule. Cliff vesting happens all at once (i.e., after five years of employment); graded vesting happens gradually (20% each year for the first five years you work at the company, etc.). If you’re considering a new job, be aware that leaving a company before your employer’s contributions have vested can mean leaving a significant sum behind, as non-vested 401(k) assets are typically forfeited.
  4. Understand the rules for accessing your 401(k) funds. Tapping into your 401(k) early should be a last resort. The money is earmarked for retirement and ideally should be left untouched until that time. Still, it’s important to know what provisions are available if you need to access your funds fast through a hardship withdrawal or a loan. A loan may seem like a better deal: Hardship withdrawals are treated as taxable income and incur a 10% early withdrawal penalty, loans do not. But that distinction only stands if you stay with the same employer for the entirety of the repayment period. Switch employers or resign and taxes and penalties kick in.

Talk to us if you have questions about making the most of your retirement plan. We’re here to help. And did you know that Adviser Investments can manage assets held within your employer-provided accounts, such as your 401(k), 403(b), 457 plans, even if you’re still contributing? If this is something you’re interested in, your adviser can answer questions and help you get started.


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