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Give Yourself a Midyear 401(k) Checkup

Emily Brandon

Midyear is a great time to make sure you are on track to max out your 401(k) or at least check to see if you are getting as many employer contributions and tax breaks as you can. Here's how to see if you are making the most of your 401(k) so far in 2014.

[See: 10 401(k) Facts Everyone Should Know .]

Make sure you are getting the match. The most common 401(k) match is 50 cents for each dollar contributed up to 6 percent of pay. In this case, you would need to save at least 6 percent of your paychecks to get the entire 401(k) match that is available. However, 401(k) matches and other types of employer contributions vary considerably by employer, so you should check with your human resources department to see what you need to do to get the 401(k) match. "That's part of the compensation package, and if you are not getting the match, you are not getting your full compensation," says Steven Medland, a certified financial planner and partner at TABR Capital Management in Orange, California.

See if you are on track to max out. Most workers can defer paying income tax on up to $17,500 in 2014 by contributing that amount to a 401(k). If you have contributed at least $8,750 to your 401(k) so far this year, you are on track to max out your 401(k). If you haven't saved that much, there is still time to increase your contributions to get a bigger tax break. "If you are not at the max, I would recommend increasing your contribution each time you get a pay increase, and keep doing that until you are at the max," Medland says.

Take advantage of catch-up contributions. People age 50 and older can contribute an extra $5,500 to a 401(k), or a total of $23,000 in 2014. To be on track to get the biggest possible tax break for 2014, workers age 50 and older would need to save $11,500 by July. The tax savings on this 401(k) contribution can be huge. A worker over 50 who is in the 25 percent tax bracket and contributes $23,000 would save $5,750 on his 2014 tax bill. Income tax will not be due on that contribution until the money is withdrawn from the account. And if he drops into the 15 percent tax bracket in retirement, he will eventually only pay $3,450 in income tax on that $23,000 401(k) contribution.

[See: 10 Trendy 401(k) Plan Perks .]

Consider saving in a Roth 401(k). Many employers now offer the option to save for retirement in both a traditional and Roth 401(k). Traditional retirement accounts allow you to defer paying income tax on your contributions, while Roth contributions are made with after-tax dollars and withdrawals in retirement are tax-free. "The general rule is if you think you are going to be in a higher tax bracket after you retire, you should put money in a Roth. If you are going to be in a lower tax bracket in retirement, you should put money into a traditional 401(k)," Medland says. "But even if you are not going to be in a higher tax bracket after retirement, it's a good idea for everybody to have at least some money in a Roth for tax diversification." Putting money in both traditional and Roth 401(k) accounts will give you options to reduce your tax bill in retirement.

Rebalance to your target asset allocation. Most 401(k) investors choose a mix of stocks and bonds that suits their risk tolerance when they first sign up for the account. But investment gains and losses often upset that balance, and you need to periodically shift it back to the appropriate split. "Midyear is when you want to look and see if your asset allocation is in alignment with your model asset allocation and make adjustments accordingly," says Andrew Jamison, a certified financial planner for Main Avenue Financial Services in Beaverton, Oregon.

[See: What Everyone Should Know About IRAs .]

Switch out of high-cost funds. Examine the fees you are paying for your 401(k) investments and compare them with similar funds in your 401(k). "In most asset classes, if the fees are over about 1 percent, you want to look if there is a reason to be in that fund," says Kevin O'Reilly, a certified financial planner and principal of Foothills Financial Planning in Phoenix. "If the fees are particularly high, most investors should not be invested in those funds."

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