Beyond Investing Basics: Tips for Maximizing Your 401(k)

 The views expressed in the blog are the author’s view and not the expressed views of SoFi. This article provides general information about the subject matter and does not purport to provide individualized tax or financial planning advice.

When I was just out of college and got my first real job, I felt a bit overwhelmed at the prospect of a 401(k). I didn’t know anything about investing. This was during the rise of day-trading, and, just like today, stock market updates were broadcast constantly. I felt like I was the only one who didn’t know what a well-balanced portfolio looked like, and that made managing my 401(k) a fearful prospect.

A lot of recent grads and young professionals feel the same way, but they shouldn’t. It’s like that TV show “everyone” watches; in fact, most people don’t watch Game of Thrones. But we assume they do, and in the same way, most people aren’t that knowledgeable about investing. You shouldn’t let that idea get in the way of taking some basic, proactive steps for maximizing your 401(k).

Here are the essentials you need to know about that all-important savings vehicle:

#1 Consider your circumstances before contributing the max

A lot of 401(k) advice revolves around trying to contribute the maximum amount allowed each year. And that can make sense for a lot of people, particularly if contributing the max isn’t a huge financial stretch. But if you’re spending every last dime trying to reach that number, it may not be the best use of your money. First, think about whether you’re going to need any of those funds prior to retirement age, because withdrawing money before then can result in a hefty penalty. There are some exceptions – for example, first-time home purchases may be exempt from the early distribution tax. But for the most part, if you know you need to save for some big pre-retirement expenses, it’s better to do so in a non-qualified account.

Another consideration is whether you should be putting all of your eggs in your 401(k) basket. Of course, these accounts can offer big benefits in terms of tax deferral, and often come with a matching contribution from your employer, as well. But if you’re eligible for a Roth IRA, you may want to consider splitting your contributions between the two.

While 401(k) contributions are not taxed on the way in but are taxed on the way out, Roth IRA contributions are the opposite – taxed on the way in but not on the way out. If you’re concerned about taxes going up or being in a higher tax bracket at retirement, then a Roth IRA can make sense as a complement to your 401(k). The caveat is that these accounts are only available to people below a certain income level. For additional information about IRA contributions, check out this IRA calculator to see which accounts you can contribute to.

#2 Don’t let yourself be swayed by hot tips

If you are not used to investing, it is tempting to panic over small losses and overreact. This is also known as “the day-trader mentality,” and it’s the worst thing you can do with your 401(k). Remember, you are in this game for the long haul, and the market has historically gone up over the long term. Getting spooked by a dip (or even a crash like the one in 2008) and pulling your money out of the market has proven to be a poor strategy time after time.

Here’s how I remember this: I have in my home a tumbler glass that “commemorates” the ‘87 crash. It showed the Dow Jones Industrial Average (a stock index) which, right before the crash, peaked at a then-record 1200. When the bottom fell out in 2008, it landed at 4000. The index is currently at 16,000. Bottom line? Don’t get caught up in the day-to-day – just keep contributing and keep focusing on the big, long-term picture.

#3 Use student loan refinancing or other avenues to get liquid – not your 401(k)

A 401(k) contains a lot of money, and it is just sitting there. It can be amazingly tempting to raid it, especially when you think that you have decades left before it’s needed. But the surprising fact is, if you add up the early withdrawal penalties, missed returns and compound interest, and other factors, even a slight withdrawal can cost you $100,000 by the end, if not more. If you need a car or a house, or want to pay off debt, there are better ways.

If you have student loans, one potential avenue for freeing up cash is to try to refinance your loans at a lower interest rate through a lender like SoFi. The average SoFi borrower saves nearly $12,000, which makes this a great way to increase liquidity without having to dip into your 401(k). Refinancing your student loans gives you the freedom to make purchases, or even just live above water, without hamstringing your future.

As always, you should be discussing 401(k) strategies with your financial advisor, asking the people you trust for advice, and researching the options independently as much as possible. Never forget that it is your money and you have a hand in its future.

SoFi is a leader in marketplace lending with over $1 billion in loans issued and more than 11,000 members. We help ambitious professionals accelerate their success with student loan refinancing, MBA loans, mortgages and personal loans. Learn more about SoFi’s products and services here.

ABOUT Brian O Brian O is a freelance journalist who has published on a number of topics, from US foreign policy to evolutionary science. Like most freelancers, he has had to develop ways to make finance work, and that inspired him to focus more on financial journalism and analysis. He now focuses his writing on helping young professionals navigate the new economic climate. He once dunked a regulation-size basketball, but no one saw it, and it haunts him to this day.

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