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If you’re getting close to retirement, are behind on your saving and are 50 or older remember that you’re allowed by the IRS if to contribute an additional $6000 for the tax year 2015 and that’s above the normal $18,000 limit. That makes a total of $24,000 you could invest in your 401(k). This can be a powerful catch-up tool.
Do increase your contributions when you get raises
There are a huge number of studies showing that when you make your saving automatic you don’t notice that missing money as much. Make arrangements with your HR department to adjust your 401(k) contributions each year when your salary increases. You’ll never miss the money and you’ll be glad you did this come retirement time.
Don’t ignore those taxes
The sad fact is that you don’t really have as much money in your 401(k) as you think. The reason for this is that it’s a tax-deferred account meaning that when you begin withdrawing funds the money will be taxed as ordinary income. If you don’t think this can hurt think about this. If you have $1 million in your 401(k) and withdraw the full amount you would pay the top tax rate, which as of this writing is 39.6% meaning it would cost you $396,000. Ouch!
Do learn if there's a vesting schedule
While you may be getting a nice matching contribution from your employer do understand that it may have put strings on it through what’s called a vesting schedule. What this translates into is whatever money you contribute into your 401(k) will always be yours. However, some employers can and do reserve the right to get back its matching funds if you quit before you become vested. While federal law limits vesting schedules the terms can still be nasty. As an example of this, your employer might require you to work a minimum of three years or lose every single penny of what it matched. Check out your vesting schedule and make sure you understand its terms. This could actually help you decided when to – or not to – get a new job.
Don’t forget about your RMDs
RMDs are those required minimum distributions the government makes you take out of your 401(k) when you reach age 70 1/2 if you’re no longer working. How much you’ll be required to take out of your 401(k) involves a lot of math based on your account balances, age and marital status. This means that once you reach that 70 ½ and are required to start taking money out of your 401(k) you should consult with a tax professional or check out the RMD worksheets available on IRS.gov. This is important because if you don’t take out the required amount you can expect the government to penalize you so it will get its share regardless.
Do think long-term and diversify
The retirement giant Fidelity Investments made the astounding discovery that it’s best-performing accounts were those of people that didn’t even realize they had accounts. This is proof positive of the power of sticking with investments and not being influenced by day-to-day changes. What you need to do is diversify across asset classes including bonds and stocks and think both domestically and internationally.
Don’t be afraid to ask for assistance
When you reach that golden age where you've paid off your mortgage and paid for your kids' college educations you need to think about the kind of retirement you want and the type of legacy you want to leave your heirs. And most importantly you need to think about when and how do you start moving money around to get there. These are critical questions and there's nothing wrong with looking for help. An accredited financial advisor could help you navigate the various tax laws and figure out a long-term plan that would help keep those golden years golden. You don't want to make an expensive mistake late in life and paying a smart person to help you could be an excellent investment.
If you'd like to know more about 401K)s, here's a video courtesy of National Debt Relief with details.