Last week, my column covered seven common 401(k)-related questions. That only scratched the surface. Here are six more. And six answers!
Is a 401(k) loan a good idea?
Some 401(k)s let you borrow $50,000, or half your account value, whichever is smaller. The wisdom of this move depends on your circumstances and other options. Taking out a 401(k) loanistypically cheaper and easier than getting a consumer loan. And you pay interest to yourself instead of some stupid bank. So if you will really repay the loan quickly, a 401(k) loan is OK.
But if the loan is longer term, or you fear you wont repay it fully or that you might lose your job soon, tread carefully. If you dont repay it, you will suffer income taxes and early withdrawal penalties. You also risk missing good investment returns, limiting your retirement savings long-term growth. For most folks, I suspect this is a bad trade-off.
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What am I invested in, and how can I change that?
Believe it or not, this is a common question. Depending on your employers plan, you may have automatically received their standard investment portfolio. Or, you may have multiple options to choose from, perhaps including age-based portfolios. Many plans use mutual funds rather than individual stocks and bonds, simplifying your choices.
If you have a self-directed 401(k), you can shift between the available investment vehicles whenever you like. You can always explore your options and ensure your approach matches your goals by contacting your 401(k) provider (an external vendor your employer outsources the guts of the plan to).
How do I track my investments?
Tracking your investments results is something you should do only once a year-ish. Dont be short-term oriented that would hurt you. Often, your year-end account statement will show your account performance. It may also be available online. Take a look at the returns your investment choices generated. How did they fare compared withothers of the same types? Your vendor should have helpful data here. Are you on track for your long-term goals and needs? Not just in the year youre reviewing, but overall. Thats what matters most.
Even if you answer yes, ask your 401(k) provider every few years for their opinion on your investment mix. Ask how you could do more with the same amount of money, especially as you near retirement.
What are ‘corrective distributions’on my statements?
Annoyances! Federal law mandates that a 401(k) benefit everyone at the firm equally. If highly compensated employees (those making $120,000 annually or more), are the plans primary participants, they may suffer extra income taxes. This is allegedly to correct for imbalances. To avoid these, talk to your employer about how to restructure the plan to increase engagement at all income levels so everyone gets similar value. Its tricky, but doable.
Does my 401(k) need help?
The 401(k) system presumes employees know how to make their own investment decisions. But colleges dont offer 401(k) classes. Basic finance is mysterious to many, and confusion over401(k)s is rampant. You may need help if you dont feel confident picking investments, or, you dont know how much to save for a comfy retirement, or you have multiple 401(k)s from multiple employers. Regardless, a check-in with your provider can help you get on track and stay there.
How do I balance retirement saving and funding my kids college?
529 plans are great for college savings. Start when your kids are young and slowly build savings for tuition, books and other expenses. But alsohave open family discussions about what you can afford for this without jeopardizing your retirement (which could burden them later on). Talk about other options, like seeking scholarships and part-time jobs. Making them work is probably the best thing you can do for them in the long run. Teenage work is great. It sure was for me.
Monthly dividend stocks are a smart choice if you're at or near retirement. (Photo: Getty Images)