Feed This Little Piggy Properly
Year-end TLC can keep your 401(k) growing while avoiding needless risk
There's no shame in using a life-cycle fund. In fact, you'll probably do better than average. The typical life-cycle 401(k) investor is likely to earn around 8.5 percent a year long term, a recent Hewitt study found, compared with 7.4 percent for a do-it-yourself investor.
Your 401(k) housekeeping doesn't end with managing assets. You'll need to check your beneficiary designations. In a 401(k) or IRA, you can name who will inherit your account if you die. Yet people often neglect to update the designation, even after divorce. Oops.
Keep in mind that 401(k) and IRA assets pass outside of probate. So, even if you stipulate in your will that you want your retirement assets to go, say, to your children, the beneficiary designation will determine who gets the money.
Finally, consider fully funding your individual retirement accounts. Does your high income disqualify you from contributing to a Roth IRA? Think about funding a traditional nondeductible IRA.
Thanks to this year's Tax Increase Prevention and Reconciliation Act, there's now a backdoor way to invest in a Roth-where investments grow tax sheltered and money can be withdrawn tax free at retirement-no matter how much you earn. The law lets anyone convert a traditional IRA to a Roth, starting in 2010, regardless of income. And everyone is allowed to fund a traditional nondeductible IRA.
It may seem too soon to plan for 2010. But in retirement, every little bit helps. And the longer you put money to work, the less likely it will be that you'll have to work in retirement.
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