Retirement account open enrollment 2016-2017: How to do 401(k) contributions right


This open enrollment season can be busy and stressful as you make your health care choices for 2017. But open enrollment isn't just about health insurance: It is also a good time to rethink your strategy for retirement savings.

Getting on top of your 401(k) game early isn't just smart, it also might be your most realistic path to becoming an actual millionaire. These accounts help your money grow quickly without racking up a big tax bill each year.

Now, unlike with health care choices, your retirement plan is not now-or-next-year — and most plans actually let you change your contributions throughout the year. But since you will likely be scrutinizing your budget for open enrollment season anyway, it's a logical time to look at and rethink retirement savings. 

Indeed, a growing number of employers are trying to prod employees into action by tying 401(k) education and reminders to open enrollment season.

Some important questions: First off — have you even enrolled in your workplace retirement plan? You should. Otherwise you could be missing out on free money from your employer in the form of a 401(k) match.

Once you have enrolled, you might have a million other questions and be feeling choice overload. For example, how much money, exactly, should you be contributing? And which funds should you choose?

Read on to help clear up any confusion and get 2017 started on the right foot.

How much can I put in my retirement plan?

For any given year, the Internal Revenue Service may adjust the exact dollar limits on how much you or your employer can add to your 401(k).

This year, the employee contribution limit remains at $18,000 (with an additional $6,000 "catch up" contribution available to those over age 50). But employer contribution limits have increased: Those can go up by $1,000 in 2017, according to a recent IRS announcement, making the maximum contribution from all sources now $54,000, up from $53,000 last year.

Of course, those numbers are likely bigger than what you feel you can spare this year. But try to aim high.

Some experts recommend saving at least 15% or more of your income if you hope to retire early. And one study suggests you'll be in big trouble if you aren't saving at least 22% of your income every year.

A minimum rule of thumb is to at least contribute enough to maximize any company match, which is essentially a 100% return on your money.

If you put in, for example, 5% of your income, your company will put in the same amount — though most will match only up to a certain limit, like 10% of your pay.

Putting money into retirement savings also helps you at tax time each year: Your contributions actually reduce your so-called "taxable income," which means — you guessed it — you'll pay less in 2016 taxes.

Use a calculator to see if you are saving the maximum you could.

What is a Roth 401(k)?

Many mid- to large-sized employers offer a traditional 401(k) plan, which lets you automatically save part of your paycheck for retirement so it grows tax-deferred, meaning you won't owe tax on those dollars until retirement. 

Not as many companies offer the Roth 401(k) plan, and those that do tend to be larger corporations. But in a Roth 401(k), taxes are paid first, so it's your post-tax money that grows — and then when you make a qualified withdrawal in retirement, it comes out tax-free.

Typically, if your company offers both a 401(k) and Roth 401(k), you'll be best off reading up on their relative benefits, and then — if possible — putting a little money in each.

Here is a calculator to compare how your money would fare in the two plans.

What choices should I make in my 401(k)?

When you look into your 401(k) or Roth 401(k) plan, you're likely to see a menu of different options for funds in which to invest your retirement money. 

Keep these three ideas in mind: "diverse," "age-appropriate" and "cheap."

Diversification means that you achieve a mix of bonds and stocks, large and small companies, and domestic and international stocks that are moving at a good pace for your age and risk tolerance.

You also don't want to overpay. Look for funds with lower-than-average expense ratios or fees; less than 0.5% is good. 

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A conservative backup plan might be to put your money in a low-cost target-date fund that will be pegged to your approximate date of retirement. Check to see if your company offers one set to your planned year of retirement, like 2050.

Because that fund automatically adjusts as years pass, it will do the hard work of making sure you are getting the right risk for your age.

What if I don't qualify for my employer's 401(k) — or they don't offer one?

In addition to a plan with an employer, you can also use open enrollment season momentum to add an Individual Retirement Account — aka IRA — to your mix.

It's often called a "traditional" IRA to differentiate it from a Roth IRA, its look-alike cousin.

The difference between the two, like with the 401(k)s, is that a traditional IRA is funded with pre-tax dollars, so you pay tax when you withdraw in retirement. But the Roth is built from after-tax dollars, so you pay no tax when you cash out.

If you make less than $117,000 (or $184,000 for married couples filing jointly), you can put in up to $5,500 this year; you won't pay taxes on the contributions or the growth until you start making retirement withdrawals.

You have yet another option: There is a sort of starter retirement fund that was launched last year for people who are not able to save for retirement through their employer.

Its called myRA, or "my Retirement Account." It is offered as a no-cost, fee-free way to save for retirement, offered by the U.S. Department of the Treasury.

It is essentially a direct-deposit payment deduction, so that a portion of each paycheck goes directly to your retirement savings. The big bonus is that it is saved in a Roth IRA, so that your money grows tax-free.

Since the only investment option is a Treasury bond, this investment is safe because it is backed by the government. But you'll only earn a little more than with a savings account — not enough to really power a nest egg. Plus there is a $15,000 maximum for savings.

Your employer may set up the deduction for you or you can contribute directly. At tax time you will be able to put any refund you receive directly into your myRA account.

MyRA does work well for young, seasonal and freelance workers because you can contribute from many different payment sources into one retirement account that stays with you no matter where you work. 

However, it is only meant to be like training wheels to other, better retirement savings tools.