Rethinking your 401(k): 5 retirement investment strategies to help you save

Key Points

  • Review your 401(k) investments regularly to ensure you’re not missing out on opportunities to increase your retirement income.
  • Consider your current and future tax situation when making 401(k) and other retirement investment decisions.
  • Some lesser known investing strategies to consider include rolling over your 401(k) while still working, contributing to an Individual 401(k) if self-employed, and using a Roth 401(k) if your earnings are too high for a Roth IRA.

For most Americans, an employer-based 401(k) is the primary vehicle used for retirement savings. While the pervasive wisdom is to put your savings on autopilot, doing so indefinitely could mean missing valuable opportunities to boost your retirement income. These strategies may help you maximize your 401(k).

5 tips to help maximize your 401(k)

 

1. Increase your savings

Even if you choose to max out your pre-tax 401(k) contributions for the year, you could boost your savings by making after-tax contributions to your 401(k). While after-tax contributions do not decrease your taxable income, the investment earnings generated inside the 401(k) do compound on a tax-deferred basis.

2. Scrutinize the options

Spend time understanding not only your 401(k) investment options, but how you want to allocate those funds. While some people prefer to use an age-appropriate mix of stocks and bonds in their retirement account, that may not be appropriate for others.

Some employer 401(k) plans also allow investing through a brokerage window, with more investment choices like individual stocks or exchange-traded funds. This may be a good option if you're not satisfied with the fund choices based on your individual situation.

With all investment options, take a close look at the fees, as they can significantly affect investment growth over time.

3. Strategize future taxes

Those who earn too much to open a Roth IRA and anticipate an even higher income in retirement may want to consider a Roth 401(k) option to lower your future tax burden. As with a Roth IRA, you'll be investing post-tax money, and you won't be taxed when you withdraw funds at retirement as long as the withdrawal is a qualified distribution.

Be sure to consult with a tax accountant as well as your financial advisor for a holistic approach to your tax strategy.

4. Contribute side earnings

If you're covered by an employer's retirement plan and earn income on the side through your own venture, you can put additional tax-advantaged retirement money aside through an Individual 401(k). Your total "employee" contribution must be coordinated with the amount you put into your company plan, but you can still contribute 20-25% of pre-tax business earnings as the "employer's" portion to your Individual 401(k) account.

5. Diversify your holdings

Sophisticated investment strategies can help you reduce taxes and enhance your returns. One example to consider, if your employer plan allows, is rolling your 401(k) into an IRA before your retirement.

Possible advantages of doing so can include greater diversification, different beneficiary options, more secure access to your account and different distribution options. There can also be potential adverse considerations such as loss of certain credit protections, possible freeze in employer matches and higher fees. Make sure you speak with both your financial and tax advisor before choosing a course of action.

Not sure which options are right for you? A financial advisor can help you understand the pros and cons and take your whole financial picture into consideration.