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Five 401(k) Mistakes to Avoid

Mistake 1:  Not Contributing to a 401(k) that matches your contribution

If your employer offers a company match for your 401(k) contributions, then you NEED to start putting money into that fund.  It is the closest thing to free money that you will ever come across.  If you already have an IRA, stop putting money into it and throw that money into the company-matched 401(k), or if you have enough money to invest in both, then do that.  The point is that it is ridiculous not to take advantage of a company match.

Mistake 2:  Not Being Aggressive Enough with your Investments

If you are 40 yeard old or younger, then don’t be paranoid to be aggressive with your investing.  The money will be parked long enough to ride out the waves of the stock market.  I never look at the one and three year rate of return for retirement plan funds.  The most important rate of returns are the five and ten year returns.  If the fund has not been open for longer than ten years, I would stay away from it.  It is not a proven fund.  Make sure you have your money in proven, growth stock mutual funds.  Stay away from bonds and value funds unless you are getting ready to retire within the next 10 years.

Mistake 3:  Caring more about your asset allocation rather than the amount your invest

No one ever gets rich by perfectly managing $50.  People get wealthy by steadily contributing good chunks of cash each month.  Stop worrying so much about where to stick the money.  Rather, worry more about how much money you are contributing each month.  Check out this investment calculator, and play with the numbers.  You will see that the amount you invest each month changes the equation much more dramatically than the rate of return.  Investing $200 a month at a 10% rate of return will give you $452,000 after 30 years.  Investing $400 a month at the same rate gives you $900,000.  Investing $200 a month at a 12% rate of return gives you 698,000.  The point here is that you can control how much you invest much more than you can control the stock market.

Mistake 4:  Borrowing from your 401(k)

I hate borrowing money to begin with, but doing it from your 401(k) is a horrible thing to do.  What other time would you ever borrow against your own money?  Also, if you leave that company before its paid off, they may ask you to cough up the money in one lump sum.  There are also fees associated with it.

Mistake 5:  Cashing out your 401(k) early

It’s a retirement fund for a reason.  The government and the company associates many perks with it in order as an incentive for you to save for retirement.  Cashing it out early makes the money subject to a 10% penalty, subject to your federal income tax rate, and subject to your state tax if applicable.  By the time you get that money, it may have taken up to a 40% hit.  The best thing to do is automatically roll it into a Roth IRA or another company’s 401(k) plan, if they allow you to do so.  The money will not have any penalties or tax hits if the money goes straight from your 401(k) fund manager to the next fund manager.  Once that check hits your hands, the money is being taxed to hell.

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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