The 401(k) can be a helpful tool for retirement savings. Investors should use caution to avoid common 401(k) mistakes.
The Internal Revenue Service (IRS) considers money you save in a 401(k)
to be a salary deferral. That means a lower tax bill from year to year, and a little boost in income for people who also get a match from their employer.
It may sound simple, but many Americans make big mistakes with their 401(k) savings. Here are four common mistakes and how you can avoid falling into those traps.
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1. Not Saving Up to the Match
One of the biggest advantages of a 401(k) is that most employers offer matching contributions up to a certain percentage of your salary. This basically doubles your money. It is like getting a little raise.
2. Cashing Out When You Leave a Job
About half of Americans choose to cash out their 401(k) when they leave a job, CBS News reported
. This is a bad idea because it usually results in a penalty of 10 percent directly to the IRS. The money often can be simply rolled into a 401(k) at the new job. If that is not an option, consider opening a traditional IRA to avoid penalties and keep that money growing for retirement.
3. Not Reviewing Your Investments as You Near Retirement
One of the biggest potential 401(k) mistakes is not reviewing your investments and keeping an eye on how your funds are performing.
4. Taking a Loan From Your 401(k)
While it may seem like a great place to get a chunk of change quickly, borrowing from your own 401(k) is another one of the biggest mistakes you can make. According to CBS News, most financial experts will advise against it because of the risk. If you leave that job, the money will come immediately due. You will also have to pay early withdrawal penalties if you are younger than 59 ½.
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