While tapping into your 401(k) is not the first choice that you should make, it is sometimes unavoidable. During the most recent economic crisis, you may have needed to withdraw from your retirement funding in order to make ends meet or cover certain types of expenses. The good news is that you can recover from this in the long run with some prudent actions right now.
The first thing you can do is to immediately begin contributing the maximum amount allowable to your 401(k). This will not only maximize your tax savings, but it can also take advantage of the employer match. In fact, when you do not grab every penny that you can from your employer, you are leaving money on the table. Of course, there are limits to the amount that your employer will match.
While your 401(k) investment options are limited to what your employers offer, there are ways to play catch-up to make up for some of what you lost if you had to withdraw from your account.
You can periodically shift between bonds and stocks depending on your feeling about the market. For example, if you are using an 80-20 split between stocks and bonds, you can go 90-10 when the market has dropped, so you can try to time the market. Then, you can reallocate your portfolio when the market rises again. However, we caution against doing that with more than a small part of your portfolio.
If you tapped into your 401(k) by taking a loan, you should pay it back as quickly as possible to recover account value. When you have a 401(k) loan outstanding, that money is not invested in the stock market and earning returns. The hope is that you are able to pay the money back as opposed to a straight withdrawal so you can avoid having to pay taxes on the money you took out of your account.
Finally, another thing that you can do to get your retirement plan back on track is to take advantage of the ability to make catch-up contributions to your 401(k) when you turn 50. The law allows you to give up to make a special contribution beyond the money that you are already allowed to set aside. For 2020, this amount rises to $6,500. While you may not receive an employer match on this money, it is a way to contribute additional money to your retirement from your pre-tax dollars. When you take advantage of catch-up contributions each year until retirement, it could add hundreds of thousands of dollars to your nest egg.
Before you take money out of your 401(k), you should have a plan for getting your retirement back on track. You will need to make sure that you are disciplined and return to saving at the first possible opportunity. The most important thing to remember is that a dollar today grows several times over thanks to the power of compounding. To the greatest extent possible, you do not want to miss out on that. We are here to help guide you to a plan that fits your desired future, contact us today.