The 401(k) is one of the most popular ways to save for retirement. To help ensure individuals are getting the most out of their plan, here is my 401(k) checklist:
□ Beneficiaries - Always make sure these are current. Are the primary and contingent beneficiaries up to date? Some name a trust as a beneficiary of their 401(k) for increased creditor protection and/or control of the distribution of the asset.
□ Roth 401(k) - Contributions are after-tax and qualified withdraws are tax-free with a Roth 401(k). The Roth is one way to keep income taxes low in retirement plus there are no required minimum distributions if rolled into a Roth IRA.
Planner's tip: If you already have made pre-tax or regular contributions in a 401(k), consider making some contributions to a Roth 401(k) going forward. This can help diversify your future tax liability, having some money come out tax-free and some taxable. Making Roth 401(k) contributions is not an all or nothing decision, you can mix and match some regular and some Roth.
□ Target date funds are mutual funds with names like Retire 2030 and are scheduled to get more conservative as you near that date. These are good for set it and forget investors. The downside is you can't control the asset allocation or take advantage of the other funds in the 401(k).
Planner's tip: I'd rather pick my own asset allocation, some target date funds are too conservative.
□ Re-balancing - Most 401(k) providers offer re-balancing, consider doing this once a year by taking some profits and adding to other areas of the portfolio that are underrepresented.
□ Tax-location - All 401(k)s offer tax-deferral of investment earnings. Consider keeping active managers or income producing assets like REITs and high yield bonds within the 401(k) to take advantage of the tax-deferral.
□ After-tax contributions - Some plans allow for after-tax contributions above and beyond the pre-tax contribution. After-tax contributions can be transferred into a Roth IRA after separation from service.
Planner's tip: If you are already maxing out your pre-tax or regular contributions, and your income is too high to contribute to a Roth IRA, consider making after-tax contributions in addition to the pre-tax. Those after-tax contributions can be transferred into a Roth IRA upon separation of service. Annual contributions cannot exceed $56k for 2019 - this includes employer match, pre-tax, Roth, and post-tax contributions.
□ In-service distributions - If the mutual fund lineup within the 401(k) is subpar or the choices are limited, some plans allow for a tax-free and penalty-free distribution from a 401(k) to an IRA. This is called an in-service distribution. An IRA has greater investment flexibility than a 401(k). You do lose the ability to take loans with an IRA and there is generally lesser creditor protection with an IRA than a 401(k).
□ Keep the fees down - Be mindful of the fees paid to active mutual fund managers within the 401(k) and consider using indexes in certain categories such as large-cap blend where the returns typically mirror the index anyhow.
□ Consolidate - Out of sight and out of mind is typically what happens to 401(k) plans left at old employers. Consider consolidating 401(k)s from old employers into the new 401(k) or an IRA for greater investment selection.