5 Smart 401k Moves for 2015

1) Start Contributing to Your 401k

• According the the ERBI, individual IRAs only account for 26.5% of all retirement savings.

• That leaves workplace retirement programs (401k, 403b, and 457) to pick up much of the slack.

1) Start Contributing to Your 401kEven small amounts can make a big difference• A 25 year-old, earning $50,000 who puts away just 3% of his/her salary

will have saved over $1.2 million by the time they retire—assuming historical market returns and a modest 2% raise every year.

2) Get Your Full Employer Match• One of the great tragedies of

retirement planning is when employees don’t get their full employer match.

• This is literally free money that you are being offered to save for retirement.

• At a bare minimum, you should aim to put the amount needed into your 401k to get the maximum company match.

2) Get Your Full Employer MatchThis “free money” can add even more to your retirement savings• Let’s assume that your employer adds 3% of your salary just for participating in your 401k,

and matches the first 3% of your contributions.• That means you’re only putting away 3%, but getting 9% of your salary in your 401k.• Using the same assumptions as before, this juices your 401k up to almost $3.4 million!

3) Check Those Fees!

• Sadly, not all 401k plans are created equal.

• You can’t decide what your investment choices are, but within those choices, you can focus on the funds with the lowest fees.

3) Check Those FeesThe best 401k plans offer low-fee funds like iShares or those from Vanguard, which average about 0.2% per year.

• For comparison’s sake, some funds charge more than 1.25% per year, and yet don’t achieve the same kind of results as the exchange traded funds (ETFs) offered by Vanguard or iShares.

• While 1.25% might sound like a low number, the effects over 40 years can be huge. – If our hypothetical worker had to take out 0.2% in fees every year, their

401k balance at age 67 would drop from $3.4 million to $3.2 million.

– If our hypothetical worker had to take out 1.25% in fees every year, their 401k balance at age 67 would drop from $3.4 million to $2.36 million—or a 31% loss from fees!

4) See if You Can Max Out Your 401k

Here’s the Problem

• While $3 million in the bank sounds great, that’s before inflation. If we assume 3% inflation—you’ll actually have $867,000 in today’s dollars.

• But even that figure is before taxes. Using the 4% safe withdrawal rule, today’s tax brackets, and assuming you’re married, your 401k will give you about $30,000 per year—in today’s dollars.

• That’s not terrible, but probably not what you’d expect from a retirement account with $3 million in it.

4) See if You Can Max Out Your 401kHere is what the 401k limits look like for 2015.

• The first bar is for all those under 50 years of age.

• Once you are 50 or over, you can contribute a “catch-up” amount.

• Any employer matches are not counted against these limits!

5) The Mega Backdoor Roth

• Let’s say you’re maxing out your 401k, but you want to retire early, and you need to put away more than the limits to do that.

• There’s a secret loopholethat can help.

5) The Mega Backdoor Roth

How this works

• I’ve written about the nuts and bolts here.

• The short story is that you can put over $30,000 in after-tax dollars into your 401k.

• You can then convert those after-tax dollars into a tax-advantaged Roth IRA account.

However, not all employers have plans that will make this possible. You have to check with your own employer.

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