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People make a lot of mistakes with their retirement savings, but there are three mistakes that are most common when it comes to 401k plans. These include not participating, cashing out when they leave their job, and taking loans. When people choose not to participate in the 401k plans offered by their employers it's often because they don't completely understand what these plans are. While every account is set up differently they do have some basic ground rules. They are set up through your employer and the money you put into these accounts is invested into stocks, bonds, money market accounts, and other ways chosen by you. You won't have so much control as to choose each tiny investment, but you will have a number of packaged plans presented to you, with varying levels of risk, and you'll be able to choose from there how to invest your savings. The biggest reason this option is a huge mistake to pass up is that employers will often match what you invest up to a certain percentage point. For instance, if you invest three percent of your income, then your employer will match that contribution. If you pass on your 401k plan, you miss out on this money entirely. When you leave your current employer for new opportunities you have a number of options of what to do with your account, one of which is to cash out. This is a very costly mistake. When you cash out before you reach retirement age, 59 years and 6 months of age, you will not only need to pay taxes on this money (both federal and state tax) but you will also need to pay a ten percent early withdrawal fee. This can easily total thirty to forty percent of your 401k, depending on your income level. Not to mention the fact that you'll be missing out on the money you would have earned between now and the time you reach retirement age through your investments. Alternatives to this include rolling over to a plan with your new employer, opening an IRA, or leaving the money where it is. The third common 401k mistake is to take out loans from your account. This isn't actually something all plans allow, but some employers do offer this option. This seems like a very convenient option, and if everything goes perfectly smoothly it can be a great option--you have a low interest rate, and the interest you pay just gets paid back into your account. However, if you don't repay within five years then it's just as though you cashed out in the first place, and if you leave your job then your loan is suddenly due back in full. In a rare set of circumstances any of these mistakes may turn out fine, but the truth is that most who make these mistakes believe they have that rare set of circumstances and then things don't turn out as they planned, and they end up losing a great deal of money. Building retirement savings takes many years, have patience, and avoid these common 401k mistakes, and you'll be well on your way to a healthy nest egg. If you're looking to learn more about retirement savings, or considering any option that may lead to cash out 401k plan visit 401k and IRA for more about your options for retirement savings.
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