The great thing about 401(k) plans is that they make saving for retirement an automatic process. With a 401(k), you sign up, tell your payroll department to deduct a certain portion of each paycheck, and effectively call it a day. But with 2020 coming to a close, now’s the time to give your 401(k) some added attention. Here are three important moves to make before the year wraps up.
1. Boost your savings rate
A lot of people lost their jobs earlier on in the year when the pandemic first struck and paused their 401(k) contributions as a result. If you did the same, but you’re back to work and are in a much better spot financially, then it pays to think about boosting your contributions to compensate. Similarly, if your income has held steady throughout the year and you haven’t yet maxed out your 401(k), it pays to put more money into that account. The more of your income you contribute to a traditional 401(k), the more tax savings you reap.
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But if you’re going to ramp up your 401(k) contributions, don’t wait. Unlike an IRA, where you can write out a check and have that money deposited into your account right away, 401(k) funds come out of payroll, and it may take your employer some time to initiate a change. Get moving soon so you don’t miss out on the chance to sneak more money into your account before the year is up.
2. Put back a CARES Act distribution if you’re able to
The CARES Act, which was passed into law in late March to provide coronavirus relief, allowed retirement savers impacted by the pandemic to withdraw up to $100,000 from a 401(k) or IRA. If you took money out of your savings but your circumstances have since improved, then it pays to look at putting that distribution back.
Normally 401(k) withdrawals taken before age 59 1/2 incur a 10% penalty. The CARES Act waives that penalty, but it doesn’t waive the taxes that come with taking a distribution from a traditional 401(k). However, if you return that money to your account, you won’t have to deal with those taxes in the near term. Just as importantly, you’ll be giving that money a chance to grow.
3. Check up on your investments
The money in your 401(k) should be working for you by generating the highest possible return with the lowest possible fees. The end of the year is a great time to check up on your investment mix and make changes as necessary. If you see that you’re paying a lot of fees in your account, you could switch some of your investments from actively managed mutual funds to index funds, which are passively managed and therefore don’t charge nearly as much.
Of course, you’ll also want to make sure your 401(k) is invested appropriately given your age. If you’re younger, you should be heavily invested in stocks. If retirement is near, you should have a chunk of your investments in bond funds, which are generally a lot less volatile.
Many of us can’t wait for 2020 to come to a close. But before that happens, give your 401(k) a closer look. A few moves on your part could help ensure that your account serves you well both immediately as well as in the long run.