Boost Your 401(k): 7 Tips

Build your nest egg by gaining maximum returns on your 401(k) investments.

For several years, 401(k) performance has been through the roof. But recently the roof has started to leak, so you may be nervous about your 401(k) investments. If you are smart about your 401(k) investments now, you can enjoy your retirement years to their fullest.

Here are seven ways you can boost your 401(k) performance so you will have more gold for your golden years.

1. Save a little more. Think about your spending habits. For example, last week: Could you have spent just $5 less? If you can squeeze your budget $5 a week, each month you can invest $25 more in your 401(k) -- $5 a week is $20 a month, plus $5 taxes saved. That grows to $12,164 over 30 years in a tax-deferred account. Isn't that a nice sum?


2. Ditch bond funds. If your retirement is many years away, invest in stocks, not bonds. Get rid of the bond funds and guaranteed income funds, and invest the money into growth stock funds. This move alone can boost your 401(k) performance by 4 to 5 percent on the money.

3. Capture the match. If your company matches any portion of your 401(k) contributions, be sure you are investing enough to take full advantage of the matching. If they match contributions up to 6 percent of your wages, put the full 6 percent into the plan. Otherwise, you are walking past money on the sidewalk that could be yours.

4. Shift out of company stock. Don't put all your eggs in one basket. You shouldn't have more than 10 to 15 percent of your money invested in one stock, even less if you work for the company. You may be stuck with employer stock that comes as matching contributions, but shift out of the employer stock as soon as you can.

5. Don't shelter your shelter. Investing in annuities lets you shelter the earnings from tax. But your 401(k) does the same thing, so investing in an annuity within your 401(k) is akin to putting two roofs on your house. Annuities have higher internal expenses, so you are paying for protection you probably don't need.

6. Curb your borrowing. Most 401(k) plans allow you to borrow against the funds, and then pay yourself back over time. That sounds like a good deal, but when you borrow you are taking money from growth investments and moving it to a lower fixed-rate return loan. The interest you pay on a 401(k) loan isn't tax deductible, so you are better off borrowing from a home equity loan.

7. Add a Roth. If your income is less than $95,000 a year ($150,000 on a joint return) you can contribute $2,000 to a Roth IRA. In a 401(k) your money is taxed when you draw it out at retirement, but in a Roth your withdrawals will be tax-free. Unless your employer matches your 401(k) contributions, a Roth IRA is a better place to stash retirement cash. Invest in both, if you can, and you'll be sitting pretty at retirement.

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