A Tax Fact from H&R Block Financial Advisors’ Investment Management Department

It’s not often in life that doing nothing is the best move you can make, but with regard to your employer-sponsored retirement plan --- your 401(k), your 403(b), etc. --- leaving it alone may well be your best course of action. “Making purely emotional decisions about your retirement funds could be detrimental to your financial future,” says Lyle Schonberger, Director of Research for H&R Block Financial Advisors’ Investment Management Department. “Even during these turbulent times, most investors should stick with their existing investment mix,” says Schonberger.

Managing your 401(k) may not be high on your priority list. So what should the average Digits reader who has an employer-sponsored plan do right now?

Increase – don’t decrease. Resist reducing the amount of money you have going into your 401(k). In fact, says Schonberger, “You might consider actually increasing the amount you put into your 401(k) because it is potentially an opportunity to acquire investments at a lower cost, and decrease your current taxable income – in effect getting more for your money.”

Get the match. Ensure that you are contributing enough to get the matching contribution from your company. Not sure what that amount is? Check with your benefits administrator for details. Depending on your age and contributions, as well as the performance of your 401(k) funds, sometimes you don’t have to save a lot to have a big impact on your future retirement savings.

Look for online calculators and research. Many employer-sponsored retirement plans provide their own online calculators to show plan participants how different mixes of stocks and bonds could impact your portfolio or retirement income. Check the website of your plan provider to see what is available to you. Examples of available tools include a contribution calculator (to see the potential of retirement savings growth over time) and a take-home pay calculator where you can learn how much your take home pay might change if you increase your contribution to your 401(k). There are also many other calculators available.  Take advantage of this information to compare various savings scenarios. Also visit research sites such as Morningstar.com, which makes research summaries and performance histories available for thousands of mutual funds.

Don’t take it out. Most experts suggest that you think twice before withdrawing your money before retirement. If you do withdraw the funds, there is the likelihood you will pay a penalty. Most plans allow you access to your contributions in two ways: a loan (as long as it is paid on time you will not be subject to withholding taxes or penalties but you will have to pay interest) and a withdrawal (once withdrawn, it cannot be put back). Please see your plan for details. Plus, Schonberger says, “If you cash out when you’re at the bottom of the market, you will get the least return on your investment.” Even if you lose your job, explore the opportunities available to you to handle your employer-sponsored plan. For instance, you could roll over the savings into an Individual Retirement Account. Or, you may be able to leave your assets in your former employer’s retirement plan, or you could transfer money to a new employer’s plan.

Diversify. Be sure to diversify between stock and bond funds. Additionally, consider diversifying your equity funds between large, mid, and small cap, and also international. The U.S. markets now make up less than half of global market capitalization, making international exposure an important part of a portfolio.

Consider target-date funds. If you are not interested in monitoring your employer-sponsored plan closely, check to see if your plan offers a target-date fund. With a target-date fund, you simply pick a fund with a date that approximates the year you plan to retire. Then, you will get a fully managed portfolio of stocks and bonds that is appropriate for someone your age. Be sure to work with your financial advisor to see if the asset mix available in the target-date fund you have chosen makes sense for your age and tolerance for risk.

Consult. Have regular meetings with your financial advisor to review your portfolio. Meeting with your advisor (at least on a quarterly basis) will give you the opportunity to take a close look at and possibly reallocate your investments within your retirement plan.

This Tax Fact is brought to you by H&R Block Financial Advisors.

To view other helpful tax information or listen to our Tax Fact podcasts, visit www.digits.hrblock.com

As always . . . everyone’s tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

This Tax Fact is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.