November 02, 2017
November is typically the month when you are able to review and change your work benefits for the year ahead. Now I know what you’re going to do. Nothing, right? Most people ignore all the emails about “open enrollment” and don’t review their coverage, or make any changes.
You might think you’re saving time, but your lack of focus is probably going to cost you a lot of money. Money you could have in retirement if you took a few minutes today to pay attention to your workplace 401(k) or 403(b) plan.
• Confirm you are getting the maximum employer matching contribution.
About one in five people saving for retirement don’t contribute enough to qualify for the maximum matching contribution from their employer. I always want everyone with a retirement plan that matches to set their contribution rate to whatever is required to earn the maximum matching contribution.
• Sign up for free re-balancing.
From time to time it is important to make sure that your investments continue to be in sync with your long-term goals. For example, let’s say you have decided that you want to have 60% invested in stocks and 40% in bonds. If you haven’t checked your mix since this bull market began in 2009, your 60/40 mix is likely closer to 75/25 today, because stocks have had such a strong run. If your plan offers a free rebalancing service, sign up for it. If not, from now on you are to use the annual fall open enrollment period as a reminder to check your 401(k) allocation and make any tweaks that are necessary. The great thing is that there is no tax bill for moving money around inside a 401(k), 403(b) or IRA.
• Consider saving in the Roth 401(k) option.
Many employers now offer two ways to save in a 401(k). In addition to the Traditional 401(k) that has been around for more than 35 years, about 10 years ago plans were allowed to offer a Roth 401(k) alongside the Traditional 401(k). If your plan offers a Roth 401(k), I think you should seriously consider using it. Especially if you have been saving in a Traditional 401(k) for years. The only difference is when you are taxed.
With a Traditional you get a tax break when you contribute; your taxable income is reduced by the amount of your contribution for that year. But then in retirement, every penny you pull out of your Traditional 401(k) will be taxed as ordinary income. It’s the opposite with a Roth 401(k). Your contributions come from salary that has already been taxed, that means you are paying your 401(k) tax bill upfront.
Then, in retirement any money you take out of your 401(k) will be 100% tax free. The ability to have tax-free income in retirement can be a big deal. We have no idea if tax rates will be lower or higher when you retire. Saving in a Roth 401(k) means you know for sure you will owe zero tax in retirement.