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401K Awareness is More Than Just Knowing You Have One

401K Awareness is More Than Just Knowing You Have One

September 13, 2023

You may not know, but the Friday after Labor Day is national 401k awareness day, so now you know! This year it fell on September 8th. 401k awareness is more than just knowing you have one. It means making the most of it, otherwise this is just another personal finance acronym that doesn’t wind up meaning much. 

Here are some questions you should ask yourself about twice a year to make sure your 401k is balanced properly. 

Are you making the most of your employer match? 

Employer matching rules can change overtime, so now is the perfect time to revisit your employee benefits to make sure you are not leaving money on the table. Most employers budget for matching, so not taking full advantage is almost like rejecting a raise which is something no one would knowingly do.

Are you using the ROTH component if it is available? 

Most younger employees who are in a lower tax bracket can benefit from ROTH contributions. If you consider the trajectory of your career, you typically make less at the beginning and therefore pay less in taxes. It might be worth it to investigate what tax bracket you are in now versus what the future may hold. This could be especially important in career fields like medicine or law, where the initial period of employment has a much lower compensation. 

What difference does this make? Well in the grand scheme of things, it doesn’t make a whole lot of sense to defer taxes when you are in the 12%-22% bracket only to pay them later at 30% plus. This is the kind of guidance we delve into each time we do planning and look at how your specific retirement plan fits as part of your total plan. 

Are you treating your 401k as a financial plan or a savings vehicle? 

A Retirement Plan isn’t a financial plan, it’s a savings vehicle. All too often I have seen people stockpile funds aggressively into plans.  

A retirement plan is a savings vehicle with many advantages, but it is only a component of a much bigger picture. Time and time again we have met with clients that are Retirement Rich and Cash Poor. This can have very negative long-term effects. It tends to force people to borrow more, incur unnecessary 10% early withdrawal penalties, or force them into higher tax brackets for major purchases they want to make from their retirement account. 

Each of these issues has a cost that defeats the normally good tax benefits of using a retirement plan correctly. It’s like trying to drive ahead down the road, with one foot on the brake the whole time. You wouldn’t do it with your car, so why do it with your personal finances?

Is your plan on autopilot? 

Many participants don’t make elections. Most plans have a default investment option but it’s important to understand that option might not be the right choice for your situation. In many instances those options may be much more conservative than you want them to be in order to hit your goals. 

Revisiting those elections is important. This is especially true in old accounts. Providers for your old jobs tend to change over time, and with each change default election options may change as well. Make sure to check in on these accounts so they stay up to date with your current financial needs and goals.

Are you considering after tax contributions? 

Many High-Income earners are locked out of ROTH IRA contributions due to income limits. Believe it or not, there are strategies to use after tax funds (not ROTH) in your employer plan as a springboard to a ROTH account, that can be periodically rolled out and converted to ROTH. There are a lot of moving parts to this process, so if you are interested in trying to figure this out, I would highly encourage you to reach out and engage us to help you figure this out. This can help prevent any mishaps in the process. 

The first step in figuring this out is getting a copy of your Plans Summary Plan Document, so we can see if your company offers this as an option. This option has the added benefit of being much cleaner than other “Backdoor” methods of getting contributions made.  Specifically because the “Backdoor” methods have additional tax pitfalls, additional tax forms, and confusing 1099s that drive tax preparers and clients crazy. 

So hopefully your retirement plan is now more than just an acronym! We always encourage clients to ask questions, attain knowledge, and get help in tackling these issues to manage their long term financial wellbeing.