Getting The Most From Your 401(k)

A 401(k) can be your best friend when planning for a comfortable retirement. Learn how to use this powerful tool.

Most employers today, large and small, offer a 401(k) plan to their employees, and it's little wonder why. Tax breaks and fund matching make these plans matchless for meeting your retirement savings goals.

Get in the game

You can't benefit from the saving power of a 401(k) unless you contribute to it. You do that by setting up automatic contributions from your paycheck, which puts the cost of retirement savings out of sight and out of mind. It may sound trivial, but your decisions on how to save or not save aren't always rational, which is why automating the process can work wonders for your financial health.

Make your contributions as large as you can afford, and as often as possible. Up to a point, of course-the annual contribution limit is $15,500, plus a $5,000 "catch-up" allowance if you're 50 years or older. If your company matches employee contributions, the 50-cent match per invested dollar might be subject to lower limits, in which case it could make sense to just max out the matching allowance. After all, an immediate 50 percent return on everything you save is pretty much unbeatable, and one of the biggest reasons why 401(k) plans are so popular and effective.

Distributing your distributions

If your employer is a publicly traded company, your company's stock will likely be among your investment options, once you start moving funds into the 401(k) account. Be careful about putting too much money into this one investment, regardless of the company's business prospects. Putting all your eggs in one basket is a bad idea, as broken eggs are as useful as spilled milk. When things go wrong, you may be out of luck, as any former Enron worker could attest to.

A better option may be a low-cost, broad-market index fund, such as the Vanguard 500. Contribute regularly and forget it, and sleep soundly in the knowledge that you'll keep up with the stock market's average returns for years to come. Historically, that's a steady 11 percent average annual return, which beats any savings or money market hands down.

No 401(k) left behind

If you're off to the next step in your career ladder, or moving on to your golden years, there are a couple of options to choose from when departing from your company.

1. Leave the old 401(k) where it is. When the paychecks stop coming in, you'll also stop contributing to the plan, but your money will keep growing.
2. Roll over. You can move your 401(k) funds into your new company's plan, or a self-managed IRA.

If you take the fullest possible advantage of your employer's contribution-matching policy, you can't lose by investing in a 401(k). Go ahead and sign up today, if you're still on the sidelines. Every month without a contribution is a lost opportunity to make more money in the long run.