The Importance of an Annual 401(k) Checkup: Keeping Your Retirement Plan on Track

As financial planners, we often emphasize the importance of regular financial health assessments. Just as you visit a doctor for an annual checkup, your 401(k) deserves a yearly checkup to ensure it’s aligned with your financial goals. A well-maintained 401(k) can significantly impact your retirement readiness, so let’s explore how to give your account the attention it needs.

Maximizing Contribution Limits

One of the most effective ways to boost your retirement savings is by maximizing your 401(k) contributions. The IRS sets annual contribution limits, which for 2024 are $23,000 for those under 50, with an additional catch-up contribution of $7,500 for those 50 and older. By contributing the max, you can take full advantage of tax-deferred growth.

During your yearly checkup, assess your current contribution rate and determine if you can increase it. Even a small percentage increase can have a substantial impact over time due to the power of compound interest. If you’re not yet contributing the maximum, consider adjusting your budget to prioritize your 401(k) contributions.

Exploring Roth 401(k) and After-Tax Contributions

In addition to traditional pre-tax contributions, many 401(k) plans offer the option to contribute to a Roth 401(k). Contributions to a Roth 401(k) are made with after-tax dollars, meaning you won’t receive an immediate tax break, but qualified withdrawals in retirement are tax-free. This can be particularly beneficial if you expect to be in a higher tax bracket in retirement.

A Wealth Manager can help evaluate your current tax situation and retirement goals to determine if contributing to a Roth 401(k) makes sense for you. A mix of pre-tax and Roth contributions can provide tax diversification, giving you more flexibility in managing your taxable income in retirement.

Additionally, some 401(k) plans allow for after-tax contributions beyond the annual deferral limit. These contributions can later be converted to a Roth account, providing another avenue for tax-free growth. Check to see if your plan permits after-tax contributions and we can help evaluate if this strategy aligns with your financial plan.

Reviewing Asset Allocation

Asset allocation refers to how your investments are distributed across various asset classes, such as stocks, bonds, and cash. This distribution should reflect your risk tolerance, investment goals, and time horizon. Over time, market fluctuations can cause your asset allocation to drift from its original targets.

During your annual checkup, review your current asset allocation and compare it to your ideal allocation. If there are significant discrepancies, it may be time to rebalance your portfolio. Your Coldstream Wealth Manager can help review your allocations and make investment election recommendations to optimize your 401(k).

Rebalancing Your Portfolio

Rebalancing is the process of realigning your portfolio to its intended asset allocation. This is crucial for managing risk and ensuring that your investments align with your long-term financial plan. Without regular rebalancing, you might find yourself taking on more risk than you’re comfortable with or missing out on potential growth opportunities.

Consider scheduling automatic rebalancing through your 401(k) plan if your provider offers this feature. Alternatively, you can manually rebalance once a year during your checkup. This disciplined approach helps maintain the risk-reward balance that is appropriate for your financial goals.

Ensuring Beneficiaries Are Accurate

Life changes, such as marriage, divorce, the birth of a child, or the death of a loved one, can necessitate updates to your beneficiary designations. Keeping your beneficiaries up to date ensures that your 401(k) assets will be distributed according to your wishes.

During your annual review, take a few moments to verify your current primary and contingent beneficiary designations. Ensure that the individuals listed are still appropriate and that their contact information is current. This simple step can prevent potential legal complications and ensure that your loved ones are taken care of in the event of your passing.

Conclusion

A yearly 401(k) checkup is a vital practice for maintaining the health of your retirement savings. By maximizing your contributions, exploring Roth and after-tax contribution options, reviewing and rebalancing your asset allocation, and keeping your beneficiary designations up to date, you can ensure that your 401(k) aligns with your broader financial plan. Taking these steps will help you stay on track for a financially secure retirement.

Remember, your 401(k) is a powerful tool in your financial toolkit, but it requires regular maintenance. Connect with your Coldstream Wealth Manager today to ensure your 401(k) is aligned with your financial planning goals.