5 smart 401k moves to make in 2020

5 smart 401k moves to make in 2020. Do you have a 401k? These five 401k moves will help you empower your retirement savings and ensure that you take full advantage of your 401k benefits.

2020 has been a challenging year in many aspects. Let’s make it count and put your 401k to work.

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What is a 401k plan?

401k plan is a workplace retirement plan that allows employees to build and grow their retirement savings. It is one of the most convenient and effective ways to save for retirement as both employees and employers can make retirement contributions. As an employee, you can set up automatic deductions to your 401k account directly through your company payroll.  You can choose the exact percentage of your salary that will go towards your retirement savings. Most 401k will provide you with multiple investment options in stocks and fixed income mutual funds and ETFs. Furthermore, most employers offer a 401k match up to a certain percentage. In most cases, you need to participate in the plan to receive the match.

1. Maximize your contributions

The smart way to ignite your retirement savings is to maximize your contributions each year.

Did you know that in 2020, you can contribute up to $19,500 to your 401k plan? If you are 50 or over, you are eligible for an additional catch-up contribution of $6,500 in 2020. Traditional 401k contributions are tax-deductible and will lower your overall tax bill in the current tax year.

Many employers offer a 401k match, which is free money for you. The only way to receive it is to participate in the plan. If you cannot max out your dollar contributions, try to deduct the highest possible percentage so that you can capture the entire match from your employer. For example, if your company offers a 4% match on every dollar, at the very minimum, you should contribute 4% to get the full match.

2. Review your investment options

When was the last time you reviewed the investment options inside your 401k plan? When is the last time you made any changes to your fund selection? With automatic contributions and investing, it is easy to get things on autopilot. But remember, this is your money and your retirement savings. With all the craziness in the economy and the stock market in 2020, now is the best time to get a grip on your 401k investments.

Look at your fund performance over the last 1, 3, 5, and 10 years. Make sure the fund returns are close or higher than their benchmark. Review the fund fees. Check if there have been new funds added to the line up recently.

3. Change your asset allocation

Asset allocation tells you how your investments are spread between stocks, bonds, money markets, and other asset classes. Stocks typically are riskier but offer great earnings potential. Bonds are considered a safer investment but provide a limited annual return.

Your ideal asset allocation depends on your age, investment horizon, risk tolerance, and specific individual circumstances.

Typically, younger plan participants have a longer investment horizon and can withstand portfolio swings to achieve higher returns in the future.  If you are one of these investors can choose a higher allocation of stocks in your 401k.

However, if you are approaching retirement, you would have a much shorter investment horizon and probably lower tolerance to investment losses. In this case, you should consider adding more bonds and cash to your asset allocation.

4. Consider contributing to Roth 401k

Are you worried that you would pay higher taxes in the future? The Roth 401k allows you to make pretax contributions and avoid taxes on your future earnings. All Roth contributions are made after paying all federal and state income taxes now. The advantage is that all your prospective earnings will grow tax-free. If you keep your money until retirement or reaching the age of 59 ½, you will withdraw your gains tax-free. If you are a young professional or you believe that your tax rate will grow higher in the future, Roth 401k is an excellent alternative to your traditional tax-deferred 401k savings.

5. Rollover an old 401k plan

Do you have an old 401k plan, stuck with your former employer? How often do you have a chance to review your balance? Unfortunately, many old 401k plans have become forgotten and ignored for many years.

It is a smart move to transfer an old 401k to a Rollover IRA.

The rollover is your chance to gain full control of your retirement savings. Furthermore, you will expand your investment options from the limited number of mutual funds to the entire universe of stocks, ETFs, and fund managers. Most importantly, you can manage your account according to your retirement goals.

Planning your 2020 taxes

 

About Stoyan Panayotov

I am a fee-only financial advisor and the founder of Babylon Wealth Management. As fiduciary advisors, we provide bespoke wealth management and personalized financial planning to busy families in the Bay Area and nationally. Many of our clients are tech workers, physicians, business owners, professionals preparing for retirement and young families looking to build financial independence.

I started Babylon Wealth Management to help young families and successful professionals build, grow and preserve their wealth. Being a fee-only financial advisor, I never earn sales commissions or sell investment products. Furthermore, I am committed to acting in my clients’ best interest by providing trusted advice and bespoke wealth management solutions. I enjoy helping clients develop robust and personalized long-term financial plans to achieve their personal and financial goals.

After completing a bachelor’s degree in Accounting at Varna University of Economics in Bulgaria, at the age of 23, I moved to New York City to pursue a Master of Business Administration at Pace University. I was fortunate enough to have a full merit-based scholarship and finished graduate school with no student loans. Upon completing grad school, I joined the ranks on Wall Street for nearly two years. I specialized in risk management and option strategies for equity and fixed income products for Deutsche Bank and Wells Fargo. In 2006 I obtained a highly recognized CFA designation.

Living in New York without family support was a life-changing experience for me. II arrived at JFK Airport on August 24, 2002. I stayed in a hostel for two weeks and later moved in with three of my fellow Bulgarian students into a one-bedroom apartment in the Bronx. There was a time in life when all I owned was $200, just enough to pay for the next month’s rent. Many times, I contemplated returning to Bulgaria, but somehow, I always pushed through life’s adversities. I’ve learned to appreciate each moment, big or small, that life presents. These challenges have helped me develop strength and flexibility, which supports my practice as a financial advisor.

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