Oct 20, 2016 4 min read

For many people, their biggest financial asset is a 401(k). This is because contributions are deducted from paychecks before you see the money. This is a form of paying yourself first. Second, the company often provides a certain match of your contribution, in effect giving you free money.

Morningstar recently looked at some common pitfalls with 401(k)s. Avoiding these can give you a more satisfying retirement.

Asset allocation is important in all asset management plans. This includes 401(k) plans.

Younger people probably do not need to have as many bond funds as older individuals. They have a longer timeframe than older workers and often can afford to take on more risk. When the market is down, they are buying on sale.

This is not true for people getting close to retirement. If the market is down when they need to start making withdrawals, they could get crushed by sequential risk.

As you near retirement, you probably should start to shift your investments to the shorter timeframe. Target dated funds try to do some of this for you, but there can be some issues such as to what target you are aiming for. If it is the date you are retiring, that would be totally different from when you may spend some of the funds 20 years into retirement.

Another drawback to 401(k)s is they usually do not have an option where you can create your own pension that you cannot outlive. A way to overcome this obstacle is most funds will allow someone to do a one-time service transfer after they reach age 59 1/2. This could be rolled into an IRA and provide this option.

You should consider your other assets when allocating your 401(k). All money when taken out of a qualified account will be taxable as ordinary income, which has the highest tax rate.

Some investments outside of a 401(k) enjoy lower tax rates such as long-term capital gains and qualified dividends. Also, if you have a pension in addition to a 401(k), you may be able to take more chances than someone who is very dependent on this money for daily living expenses.

No one can time the stock market with any regularity. Do not try to do so with your qualified money either. Watch that you do not overdose on your company stock. Enron taught everyone an important lesson about this when many of their employees lost all of their retirement savings when the company folded.

As your salary increases, try to save some more of your raise in your retirement account. Many people stay at the low rate that they began with. Three or 4 percent is not enough to fund a good retirement if you do not have a pension or significant other savings. There is a TV commercial urging you to save 1 percent more; that might be a good starting point.

The contribution levels have increased over the years. Investors over 50 can contribute $24,000 to a 401(k) while people under that age can save $18,000. Today, many people work for multiple companies during their career. When they leave a job, too many people cash out their plan and spend the money. This hurts retirement, increases today’s taxes and can cost you an extra 10 percent penalty if you are under 59 1/2.

More plans today offer a Roth option. When you use this, you do not get a tax deduction today, but you do not have to pay taxes on the gains if you hold the plan for at least five years and you are 59 1/2 or older. While you can always withdraw your contributions tax-free, earnings do not have that option unless you follow the rules. While Roth IRAs do not have required minimum distributions, 401(k) Roths do. You can possibly avoid this by rolling your money over to a Roth IRA. If not having to take required minimum distributions from a Roth is important, you may want to let you congressman know, because the President proposed changing that in his latest budget proposal.

Avoiding these pitfalls should help you have a more enjoyable retirement.?

Gary Boatman is a Monessen-based certified financial planner. He is the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, contact business editor Michael Bradwell at mbradwell@observer-reporter.com.