How to Invest Your 401(k)

By Samuel Becker · February 16, 2024 · 7 minute read

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How to Invest Your 401(k)

Utilizing your 401(k) retirement account can seem daunting to beginner investors, but there are numerous strategies and tactics you can use to improve returns. Before any of that happens, though, investors will want to be sure to sign up for a 401(k) retirement account through your employer, which is often as simple as filling out a form.

As for the rest? Investing in your 401(k) doesn’t have to be complicated. From understanding your investment options and choosing your portfolio, to common mistakes to avoid, read on to get into the nitty-gritty.

How to Invest Your 401(k)

Investing in your 401(k) can often be as simple as making some basic investment choices. But it’s also good to know exactly how the account works.

As a refresher, a 401(k) is a type of tax-deferred retirement account sponsored by your employer. If you work for a non-profit, a school district, or the government instead of a company, your retirement plan might be a 403(b) or a 457(b) plan. All of these plans are employer-sponsored, meaning they pick the plan — and most of the information here applies to all three types of accounts.

You and your employer can both contribute to a 401(k). Many employers match employee contributions to some degree, and some may even contribute a portion of company profits to employees’ accounts (that’s known as a 401(k) profit-sharing plan).

Contributions are capped by the IRS: For the 2024 tax year, the maximum amount an individual might contribute to a 401(k) is $23,000, with an additional $7,500 in catch-up contributions allowed for people over age 50. The total amount that might be contributed to a 401(k), including matching funds and other contributions from an employer, is $69,000 (or $76,500 for people over age 50).

For the 2023 tax year, the maximum amount an individual could contribute to a 401(k) is $22,500, with an additional $7,500 in catch-up contributions allowed for people over age 50. The total amount that might be contributed to a 401(k), including matching funds and other contributions from an employer, is $66,000 (or $73,500 for people over age 50).

With all of that in mind, here are some things to remember as you start to invest in your 401(k), or look for ways to improve your returns.

💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

Assess Your Goals

Investors should really take the time to assess their overall investment goals, and think about how their 401(k) fits into achieving those goals. Each investor will have different goals, and that means they’ll be willing to take different risks and be on different timelines as to when they want to reach those goals.

Again, this will vary from investor to investor, but before making any moves, it can be helpful to think more deeply about goals. Talking to a financial professional may be helpful, too.

Determine Your Risk Tolerance

Every investment comes with risk. The key is assessing your comfort level with risk now, and going forward. Whether you’re picking a target date fund or making your own mix of investments, you’ll want to allocate your money based on your needs and risk tolerance.

One rule of thumb when it comes to retirement investments is that the younger you are, the more risk you might be able to handle. The thinking goes that you will have more time to recover from market drops to allow riskier investments to pay off.

On the other hand, people closer to retirement may choose to adjust their investments. There, the goal would be to minimize risk, so that the savings they will soon need would not be overly impacted by a market downturn.

Look at Diversification

Diversification is critical when building a portfolio, so investors should keep an eye on what’s in their portfolio. An individual employee may not have a whole lot of say as to what exactly is going into their 401(k) investment mix, but you’ll want to keep an eye on things and stay abreast of the way that your portfolio manager is diversifying for you.

Target-Date Funds

A target-date fund is a mutual fund with a passive mix of investments aimed at a “target” retirement date. The mix of assets (stocks and bonds) typically becomes more conservative as your target retirement date nears. For people who prefer a hands-off approach, these funds might be a good investment option.

Something to keep in mind is that you don’t necessarily have to pick the target date based on when you actually plan to retire. If you feel the mix of assets is too aggressive, you might choose to select an earlier retirement year to take less risk.

Factors to Consider

Additionally, there are many factors investors will need to consider as it relates to their 401(k), such as their time horizon, expenses, and contribution levels.

•   Time horizon: How long do you plan to invest? Investors will want to keep long-term returns in mind, and their investment mix and other choices can have an impact on their returns.

•   Expenses: Investments often have expense ratios or other fees that can eat into returns, which is another thing to keep in mind.

•   Contribution levels: The more you save for retirement and the earlier you start saving, the better off you’ll likely be in retirement. If you’re lucky enough to have an employer that matches your contributions, at a minimum you’ll probably want to take full advantage of your employer match.

Remember: Maximizing your 401(k) tends to benefit you in the long run. 401(k) employer contributions vary, so it makes sense to find out how matching works at your company, and then contribute at least enough to get that “free money.”

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401(k) Investing: Things to Keep In Mind

There are a couple of other things that investors may want to try and keep in mind in regard to their 401(k), such as leaving old accounts open, and over-investing in specific funds.

Putting Everything into a Money Market Fund

A money market fund is a mutual fund made up of relatively low-risk, short-term securities. It’s a tempting move, because it feels like you don’t risk losing money. You’ll want to gauge whether your investing returns are outpacing inflation, accordingly. That may be the case if your money is only being invested in a money market fund — in fact, that may be the default if employees don’t make investment selections for their portfolio. You’ll need to check with your plan provider to find out.

Leaving Old 401(k)s Open

When you leave your current employer, it’s often a good idea to roll over your 401(k) into a traditional or Roth IRA. Most 401(k) accounts have fees associated with them. While typically an employer will pay those fees while you work for them, once you’re no longer with the company, many will stop paying them for you.

By moving your money into an account of your choosing, you have more control over the fees you pay. You’ll also generally have a broader range of investment choices.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

The Takeaway

Investing in a 401(k) retirement savings account is fairly simple, especially since you can set it up through your employer. Whether you are typically a hands-on investor or prefer a hands-off approach, you can get your 401(k) contributions up and running — and start saving money for your future.

If you have an old 401(k), as noted above, you might want to consider doing a rollover to an IRA account so you can better manage your savings in one place.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.


Can I invest my 401(k) on my own?

It may be possible to invest in your 401(k) on your own, as some employers offer a self-directed plan option, which gives investors more choice and say over their portfolio.

Is it possible to make my 401(k) grow faster?

To make your 401(k) grow faster, you can look at increasing your contributions (up to a specified limit), or changing your investment mix. But note that many investments with higher growth potential tend to have higher associated risks.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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