When it comes to saving for your future retirement, it’s never too early to start. In fact, the earlier the better. If your employer offers a retirement plan, you should be saving something for your retirement each paycheck. Some employers offer to match a certain percentage of your contributions. As you save for your future there are 4 common mistakes that you should avoid.
- Contributions. Any contributions to your 401(k) or other similar retirement plans, are pre-tax. This gives you a tax-advantage way to save for your future retirement. However, it’s unfortunate that there are many employees that will opt out of the retirement plan or perhaps not contribute as much as they should. If you have the option to participate in an employee sponsored plan that matches a percentage of your contributions, at a minimum, you should be contributing the amount your employer will match.
- Company stock. Have you ever heard that old saying “Don’t put all your eggs in one basket?" This advice holds true for many things, just as it does for your company stock investments. It’s very important that you don’t invest too much in the company stock. The company may be doing great right now but things can change quickly. If your company closes its doors or you lose your job for any reason, if you diversify your investments, you won’t lose your retirement savings on top of losing your job.
FYI: You won’t have a choice of where to invest if your employer only matches the company stocks. However, any amount that exceeds the company matched stock, you can decide where to invest your contributions.
- Borrowing from your account. You should only borrow from your plan if you have no other choice. When you borrow from your plan, you are losing tax-deferred growth on these funds. There may also be penalties for early withdrawal as well as tax consequences. Emergencies do arise from time to time, but these savings are for your future retirement. Try to think of them as “untouchable” funds.
- Changing jobs. It can be very tempting to cash-out your retirement plan if you’re changing jobs. However, the better plan is to talk to your financial advisor about rolling over your funds to your new employer’s retirement plan.
FYI: If you do cash-out your funds you will likely owe a penalty for early withdrawal as well as tax on the amount you withdraw.
At Summit CPA we offer multiple resources to assist you with all of your tax and financial needs. Contact our office at 866-497-9761 to schedule an appointment with our advisors.