You don’t want to regret your choices later.
Understanding your 401(k): How it works and why it matters.
What is a 401(k) plan? Key benefits and how to maximize your savings.
Saving for retirement is one of the most important financial actions you can take. Once you stop working, you’ll need a way to pay your bills. And social security alone can’t make up for it.
If you earn an average salary, you can expect Social Security to replace about 40% of it. But most people need more than just a retirement income, so it’s very important to save for yourself.
But there are also certain mistakes you risk making in the process of building your nest egg. Here are three to avoid at all costs.
1. Overlooking the benefits of Roth accounts
When it comes to building your retirement nest egg, you have options. When you put money into a traditional IRA or 401(k), you get an immediate tax break on your contributions. Or you can forego the tax break and save in a Roth IRA or 401(k) instead.
You may be inclined to abandon the Roth to make your contributions tax-free. But keep in mind that with a Roth retirement account, not only are withdrawals tax-free in retirement, but any gains in the account are also completely tax-free.
Imagine being able to turn a $50,000 Roth IRA contribution into $500,000 over time through smart investing. In that case, you could earn $450,000 without paying a dime to the IRS.
Traditional retirement plans ultimately force you to not only pay taxes on your gains, but also take required minimum distributions (RMDs) in the future. These can result in you paying extra taxes in retirement and cause a lot of stress.
Imagine a situation where you have to receive a $5,000 RMD, but you don’t need the money. Ignoring an RMD can result in a $1,250 penalty. When you receive an RMD, you pay taxes on that amount. It’s a lose-lose situation.
Roth accounts do not come with RMDs. If you need more flexibility in the future, it may be worth choosing one over the other.
2. Not enough branching
So I found killer stocks for IRAs: stocks that are generating impressive returns and seem unstoppable. While it may be tempting to keep buying more stocks, you need to realize that focusing all your efforts on one company is a recipe for disaster.
One of the most important things you can do as a retirement investor is to diversify your portfolio. That way, if a particular stock you own goes down in value, you don’t necessarily lose your entire portfolio in the process.
A good way to diversify within your IRA is to accumulate stocks across different market segments. Employer-sponsored 401(k)s typically don’t allow you to own stocks separately. However, you can diversify your investment by investing in stocks. S&P500 index fund.
3. Not paying enough attention to fees
If you own a 401(k), it can be difficult to invest because it’s usually restricted to a variety of funds. That’s because you don’t have full control over the assets you invest in.
You might want to put your money into a target date or mutual fund and see where it goes. However, in that case, you may end up paying high fees and your profits may erode over time.
Are there better bets? We aim to continue with low-cost index funds.
Index funds are passively managed in nature. They simply aim to match the performance of the benchmarks they are associated with.
It’s also important to find out what administrative fees will be charged for participating in your employer’s 401(k). If costs are high and you can’t get a match at work, it may not make sense to keep your savings in the plan when you could open a lower-cost IRA instead.
Saving for retirement is great, but it’s important to do it strategically. Aim to avoid these mistakes so you can retire without regrets.
The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner providing financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
