Understanding Your 401(k) to Maximize Retirement

The following is a summary of our recent interview with Paul D Horn CFP, which can be accessed on our site here or on iTunes here.

Many people use 401(k)s to plan for retirement and to help shelter assets from tax liability, but often investors aren’t getting the most out of their various options.

This time on Financial Sense’s Lifetime Income Series, we spoke with Paul Horn, a San Diego-based financial planner with PFS Group, about recent changes in 401(k) rules and how investors can best utilize their available options.

401(k) Basics

Paul first points out that 401(k) deduction amounts have changed for 2017. For any individual making contributions this year, $18,000 is the annual amount they’re allowed to contribute. If they are over the age of 50, they can add an additional $6,000.

“The max amount of contributions that can be put into the 401(k) is $59,000 a year between employer and employee,” he added.

Paul also mentioned a number of basic or common errors that are made with 401(k) plans.

“Often times, people don’t rebalance their 401(k)s,” he said. “The biggest problem that I see is the lack of management or lack of oversight … of the 401(k) plan.”

Most clients use a set-it-and-forget-it strategy, Horn added. While taking a passive approach in itself is not a bad idea, what investors still need to account for is making sure the allocation they’ve used matches their risk tolerance level, and also remembering to rebalance either on a quarterly or annual basis.

ROTH Versus Traditional Options

The first thing to consider is whether an employer is offering the option of doing a Roth 401(k) versus a traditional 401(k), Horn stated.

“For our younger listeners, or those in lower tax brackets, they can really benefit from the tax-free growth that the Roth 401(k) provides,” he said.

Though Roths have increased in popularity in the last 10 years, they’re still underutilized, Horn added.

Of the $18,000 or $24,000 annual limit, 100 percent can be put into a ROTH account. The money’s put in after tax, so it grows tax-free, and it is not subject to the required minimum distribution, whereas the traditional 401(k) is still subject to those RMDs, Horn stated.

Best Practices

The most important thing you can do is make sure you understand your plan and the different advantages it offers.

Also, always make sure you’re making maximum contributions, within reason, Horn stated.

“Don’t ever leave money on the table,” he said. “If you’re employer’s offering a 6 percent match, at least put in that 6 percent, because that’s a 6 percent raise your employer’s offering you that you may not be taking advantage of.”

One issue he sees commonly is when investors employ target date funds, which are designed to simplify the investment process and are often the de-facto option. Unfortunately, they aren't always the best fit, he says.

“That’s the funny thing about these target date funds,” he said. “They’re not standardized. Whether they’re going to be too conservative for an investor or too aggressive is really difficult to ascertain, but typically it’s not in line with a client’s goals.”

Have any financial planning questions? Give Paul Horn a call at 858.487.3939 or email him at paul[at]puplava[dot]com.

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