How to Invest in 401K

Two Methods:Determining How Much to SaveDetermining How to Invest

A 401K plan is a retirement program sponsored by your employer in which you make contributions to your retirement savings. This money is invested on your behalf and in a manner you select. There are tax benefits to this type of retirement planning, because your contributions are made before they are taxed. Any income your contributions earn is also tax-deferred. Invest in a 401K by exploring the options available through your employer, determining where to invest and how much you need to save for a comfortable retirement.

Method 1
Determining How Much to Save

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    Know your limits. The Internal Revenue Service (IRS) establishes the maximum individuals can contribute to their 401K every year. Your employer might also impose limits on you.
    • Check the IRS website for limits, which can change from one tax year to the next. For example, in 2013 investors under 50 were able to save up to $17,500 in pretax dollars through a 401K. If you were 50 or older, you could save up to $23,000 that year.
    • Talk to your plan administrator at work about what the company allows you to contribute. Some employers might use a particular percentage of your salary as a limit to your annual 401K contribution.
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    Determine how much you need to save. There are retirement calculators you can access online (CNN Money, Bankrate, Bloomberg, Kiplinger, AARP), or you can work with a financial planner to determine your retirement savings goal.
    • Save as much as your budget will allow if your 401K is the only way you are saving for retirement. Financial planners recommend contributing at least 10 percent of your salary to your 401K.
    • Adjust your contributions if your 401K is only one part of your retirement strategy and you have other investments.
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    Think about your age. There is a reason the IRS allows older people to "catch up" by contributing extra money to their 401K. As you near retirement age, you may find that you need to save more (or "catch up") in order to enjoy the retirement lifestyle you're hoping for.
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    Take your full employer match. Some employers make matching contributions to their employees' 401Ks. If you can, you should contribute as much as it takes to maximize your employer's match. Don't pass up that "free" money. It's like getting a raise in pay.
    • Ask about your employer's vesting schedule. This will tell you how long you need to be with the company before you can access the full amount of those matching funds.

Method 2
Determining How to Invest

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    Ask for financial planning advice. Some 401K plans are managed by third parties through your employer, and they may offer management services for a small fee (usually around one percent of your earnings).
    • Work with your own financial planner if you have one. A professional can incorporate your 401K investments into your overall retirement portfolio. Hire a financial advisor only if s/he is fee-based rather than commission-based.
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    Decide how you want to allocate your assets. You can invest your 401K contributions in stocks, bonds, mutual funds, commodities and cash equivalents.
    • Establish the amount of risk you can handle. For example, stocks offer investors the best shot at long-term earnings, but they are riskier. Typically, the more time you have until retirement, the more risk you can tolerate. Risk and reward usually go hand-in-hand.
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    Review the mutual funds available in your 401K plan. Look for consistently high returns, good fund management and a low expense ratio to maximize your investment.
    • Read the prospectus for every fund available through your plan in order to get an idea of whether it is a good fit for your risk level and investment goals.
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    Diversify your investments. Spread your money across many different stocks, bonds, mutual funds, commodities and money-market instruments. This is the best way to avoid losing money when a single investment drops in value.


  • Remember to rollover your 401K when you switch jobs. You do not want to cash out of your 401K before you retire, because it will come with penalties and taxes. Once you are eligible for a 401K program at your new job, you can roll your existing funds into your new plan.


  • Don't invest all of your 401K funds in your company's stock or in any other single company or industry (such as technology or oil). Diversification is a crucial element of smart investing. Spreading your money across different investments will go a long way toward protecting yourself from unnecessary risk.

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Categories: Investments and Trading