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Five-point 401(k) checklist: creating a healthy account

Can you believe over 52 million Americans have over 4 trillion dollars invested in 401(k) accounts? While most understand the mechanics behind the 401(k) – allowing workers to save and invest a portion of their paycheck before taxes are taken out – many are not aware that there are things to think about regarding maximizing your account’s financial security.

Attached is a five-point checklist to maintain a healthy 401(k):

1) Know Your Investments

With close to 30 years in the financial service industry, I still hear quite regularly from people who are not familiar with their 401(k) options. Often, people pick and choose their funds based on what did well last year, which from a strategic standpoint, is setting yourself up for increased risk in growing your retirement income. It is important to know what you have and how to allocate and diversify your assets around different types of funds. Appropriately diversifying your assets amongst a variety of funds is an important way to reduce your overall investment risk. Certainly, there are highly qualified professionals within the financial services industry able to assist your concerns, but if you are not inclined to utilize their services, many providers have someone you can talk to about your account.

2) Identify Risk and Rebalance

One of the biggest tips in the investment world is setting up a portfolio and then rebalancing to maximize your account value. Taking the time to identify, analyze and rebalance is one of the easiest ways to minimize your risk. About once a year, take the necessary steps to follow through with this assessment.

3) Have a Withdrawal Strategy

When withdrawing funds (referred to as distributions), it is important during retirement to create a strategy based upon your long-term needs and not react based on short-term wants. People can take distributions from their 401(k) prior to the age of 59 ½ (discussed below) but the IRS will assess a penalty of 10% in addition to the income taxes due. The IRS offers significant tax benefits for employer-sponsored retirement plans because the government is encouraging individuals to save for retirement. Therefore, these accounts are never subject to capital gains taxes and allow employees to make contributions on a pre-tax basis, including company matching contributions.

4) Know the Beneficiary Options for Passing on a 401(k)

Interestingly, despite what many individuals think, options for passing along a 401(k) to a beneficiary are based upon plan-specific rules and are not mandated by the IRS. Investigate and understand the plan’s restrictions and requirements, as they may vary from employer to employer. Due to this, once you retire, it is a wise business decision to rollover your 401(k) to an IRA (Individual Retirement Account), which offers more flexible beneficiary options.

5) Age 59 ½ or Retirement Rollover

If you are still in the workforce at age 59 ½, almost every 401(k) allows the option to roll the money into an IRA where you have more flexibility and control and can receive professional advice.  At retirement, you should roll your money into an IRA but also something to seriously consider at age 59 ½ as well.

Even though there are over 4 trillion dollars invested in 401(k) accounts, according to the Bureau of Labor Statistics, only about 55% of the American workforce has access to a 401(k), and only about 38% of the total workforce participates. If you are fortunate enough to be offered an employer-sponsored plan, take the time to know your investments, identify the risks and rebalance, create a withdrawal strategy, understand beneficiary options and know how and when to rollover the account.


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