Results tagged “401k”

As the year comes to a close, I can say this has been a real eye-opener of a year for me.  Being in my mid 20's, this is the first year of negative returns I have had.  Here are the top mistakes I made this year in terms of personal finance that I will not be making next year.

I front loaded all of my Roth IRA contributions in the first two months of this year.  I thought that the market was already as far as it would go and it was a good buy.  Only time will tell whether or not those purchases were a good buy.  Next year, dollar cost averaging is the way for me.  I will purchase only no transaction fee mutual funds and will do them every month at the least.  The actual time frame will depend on minimum transaction amount per fund.  

I had sufficient money and got careless.  New budget already created and being monitored.

Presently, I think that my play this year in having at some point all of my money go into a defensive play in March was a good one.  The fund remained steady while everything else declined.  It somewhat fell in the last quarter of 2008, but I think overall it would have been more prudent to do some balancing throughout.  I'm not committed to re-balancing yet but will be shortly.

Giving Into Heavily Beat Down Stock Prices

Just like Forest Gump always said, "I'm not a smart man."  I bought the bad ones - E-Trade (ETFC) and even worse, Fannie Mae (FNM).  Please Rinse and Repeat - Past performance (or price) does not indicate future performance (or price).

Peek-a-Boo!

Just because I have a nice website and tracking software doesn't mean I should be looking daily at performance percentages - it's not healthy and doesn't make my portfolio better off.  

Next year may not be better, but I have been forewarned.

What is the quickest way to ensure you don't get a big head about a raise or promotion?  Couple that extra (hopefully deserved, you know who you are!) money with a switch from a traditional to Roth 401k.  Not only will the increased salary increase your annual contribution if not already maxed out, but it would convert the extra money you earned, and probably more, to additional taxes you'd pay.  This doesn't make sense for everyone by any means, but if you are worried that bringing home more money will just make you waste it and perhaps you've already maxed out your Roth IRA and Traditional 401k, this could be an option that works for you. 

If you were at a loss, as I was, about the basics of a 401k when you had the option of first starting one up, let this post be your guide.  I make some recommendations in here, but take no responsibility for their 'soundness' - I am not a personal financial planner (but I am a good deal cheaper!).

For this year, assuming you are not old enough to make catch-up contributions, you can contribute $15,500 as employer contributions.

This question is a bit more tricky.  You have to manage how much you want to contribute versus your other goals.  I can tell you I contribute a percentage of my salary that maxes out my contribution each year. If your company matches, I strongly suggest at least contributing as much as needed to completely attain their match.  I would suggest that you also consider not contributing too much and not being able to maintain a cash reserve fund for emergencies.  If you think you can deal with 10% (and believe me, you can!), I'd start with that and adjust based on your needs.  In a future post, i'll get into more advanced logic for structuring dollars between 401k and IRA, but the point here is to start saving now and build your strategy progressively. 

This is a controversial topic.  There are tax advantages today for contributing to a traditional 401k - it lowers your taxable income for the year by the amount you contribute.  Roth has the tax advantage deferred.  You pay tax on roth type contributions now, and in turn don't pay any taxes when you withdrawal the funds at retirement (which you do have to pay when you withdrawal from a traditional 401k).  If you need cash now, or think that (and believe me it's anyone's guess) that you'll be in a lower tax bracket when you retire, then a traditional account makes sense.  I personally contribute to both and here's why.  When I retire, I want to pull some money each  year from a traditional account and some from a roth.  This should (I believe) allow me to claim a very low amount of taxable income for the year, as the traditional amount would be the only amount I have to pay taxes on.  This should guarantee myself a lower tax bracken in the future regardless of governmental tax rate changes.  I feel I've essentially mitigated the gamble of tax bracket changes by contributing to both.  

No one knows.  General advice is to diversify and choose low fee/no load options. If you have no clue, you can always choose the fund with a date on it that corresponds to the year nearest your goal retirement date, as it will change the amount of risk  as time goes on - less and less risky investments as retirement date nears.  

There are many calculators out there.  Run any of them and it's apparent that savings for a 401k as long as it doesn't financially put you in a position to take out credit card debt, makes great sense - especially starting early.