4 Things You Should Know About Your 401(k)

If you're fortunate enough to have a 401(k) plan through work, you have a real opportunity to sock away some serious money for your golden years. Here are four important things you need to know about that retirement plan.

1. What the annual contribution limits are

The amount you're allowed to put into a 401(k) on an annual basis varies from year to year. For 2019, the limit is $19,000 if you're under 50, or $25,000 if you're 50 or older. Even if you're not able to max out your contributions at present, it pays to know what the limits are. You may decide to make lifestyle changes that enable you to max out at a later point in time.

2. What your fees entail

Unfortunately, it costs money to save in a 401(k). All plans come with administrative fees that are generally passed on to individual participants. The good news is that your 401(k) is required to disclose those fees in its summary plan description. The bad news is that there's not much you can do about them.

What you can do, however, is limit your investment fees. When you put money into a 401(k), you get to invest it as you choose. Most 401(k)s offer a mix of actively managed mutual funds and index funds that are far more cost-effective. The reason? Index funds simply track existing market indexes like the S&P 500 or the Dow Jones Industrial Average, and as such, their fees are relatively low. This means that you lose less money on the investing side.

3. What type of match your employer gives

Most employers that offer 401(k) plans also match worker contributions to some degree. It pays to understand what your company match looks like and how much money you need to put into your 401(k) to get it, because if you don't, you'll essentially be giving up free money.

For example, if your employer offers to match contributions that equal up to 3% of your salary and you make $60,000 a year, putting in $1,800 of your own money scores you an additional $1,800 from your employer. Giving up that match for even a single year could have negative long-term consequences, though. For example, if you forgo $1,800 in matching dollars this year, retire 40 years from now, and earn an average annual 7% return on your 401(k) investments, you'll wind up losing out on roughly $27,000 in retirement dollars when you factor in that growth.

4. What your vesting schedule looks like

Some 401(k) plans come with a vesting schedule, and if yours does, you'll need to understand how it works to avoid losing money. Vesting means taking complete ownership of your money over time. Now let's be clear: The money you contribute to your 401(k) from your own salary is yours immediately. But the same won't necessarily hold true for the matching dollars your employer puts in.

For example, your employer might impose a four-year vesting schedule for retaining ownership of the money it contributes to your account. For each year you remain an employee, you'll be 25% vested so that if you leave after two years, you'll only get half of the money your company put into that plan on your behalf. Understanding your vesting schedule might help you make smarter employment decisions -- for example, how long to stay with your company versus moving on to another one.

The more informed you are about your 401(k), the greater the chances of it serving you well in retirement. If you have questions about your plan and don't know the answers, speak to someone in your human resources or benefits department, or contact your plan administrator directly so you don't remain in the dark.

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