Created: June 1, 2022
Modified: August 23, 2022

401(k) Account Checkup

Today we’re talking about the 401(k) checkup. You get an annual physical checkup, maybe even more than annual, to make sure you’re healthy, but do you do a checkup on your 401(k) to make sure it is?

We’re going to talk about your contributions and how much you should contribute based on your age. We’re also going to give you a little checklist where we go through the investments, the risk and rebalancing strategies, and your withdrawal strategies. So important. Your beneficiaries, how should you dictate beneficiaries and decide on beneficiaries? And also, some magical things happen at ages 59.5 and 55. All kinds of great information on your 401(k). We’re also talking about 403(b)s, so if you work in the not-for-profit sector, you might have a 403(b) or you might have a simple IRA.


Let’s get started with contributions. You might have 401(a). Any account where you can defer money into it out of your paycheck, that’s what we’re talking about here, but we can kind of catch them all by saying 401(k) strategies. So, how much should you contribute? And what kind of contribution should you make? If you’re in your 30s, it’s my belief that you should be putting everything into the Roth side of your 401(k).

Roth IRAs are something fairly new. They’re only 20 years old, so I would consider them fairly new in the history of the US. The Roth bucket inside your 401(k), where you can say, “No, I don’t want it to go into the pre-tax side, I want it to go into the Roth side.” That is really, really important the younger you are. Taxes are going up. There are not a lot of guarantees in life, but I think based on the spending that our federal government is doing, based on the inflation that’s coming down the pike, based on some of the stimuli that we’ve done recently, taxes are going up. Might be phantom taxes.

When I say phantom taxes, it might be things like inflation and so on and so forth, but taxes are going to go up in one way or another. I think if you can pay taxes on your contributions today, not necessarily get that tax deferral today, but you have all tax-free income in the future, you can leave money tax-free to errors in the future.

In Your 30s

I think that’s a home run. So if you’re in your 30s, contribute to the Roth side of your 401(k). If you’re in your 40s, it depends. It depends on how high your income is now, versus, what it might be in retirement. It also depends on how much control you have over your income in retirement and how much control you have over it now. And it depends, for example, you might be a business owner where you have one year where you make over $1 million dollars and you have another year where you make very little.

40s & 50s

In your 40s and 50s, it could go either way, again, depending on how much money you’ve saved. When I was 55 or 56, I changed all my contributions in my 401(k) from pre-tax to Roth. This means I’m willing to pay some taxes today so that I’ll have tax-free money in the future to either spend myself or leave to my kids. Is there a guarantee taxes will be higher in the future for me? I believe there is. Even if there’s not, at least I’ll have some options in retirement because I’ve got so much money over on that traditional side or on the pre-tax side of that 401(k).


In your 60s, you need a retirement plan. You’ve got to figure out a long-term income plan and depending on what that long-term income plan is, that’ll decide whether you want to put money into the Roth side or the traditional side. Roth, meaning you pay taxes today and it’s tax-free forever on your contributions, or traditional, where you get a tax deduction today, but you’re going to have taxes when you take it out. I believe you should contribute 15% of your income to your retirement plan or to long-term savings. A lot of that should be in a retirement plan. Remember, retirement plans are protected from the claims of your creditors. If you can get money into that 401(k), simple IRA, or 403(b), there’s protection from the claims and your creditors.

Save, Save, Save

The majority of your retirement savings, if you’re of moderate income or slightly above average income, should be in a 401(k). How much should you contribute? Again, 15%. Why do I repeat myself? Because it’s critical. If you can start in your 30s and contribute 15% of your income to the 401(k), by the time you get to age 55, you’ll be able to live like none of your friends. Your standard of living and your choices in life will be absolutely phenomenal if you can start and save 15%. And remember, a lot of times you save 15%, your employer matches another 3%, 4%, 5%, 6%. So that’s how much to contribute, 10% or 15%.

Now you say, “Joel, there’s no way I can do that. I’ve got all these family obligations at home.” Okay. Set a two-year goal of getting up to 15% in two years. You should probably get raises over that two-year period of time, so make sure you up your contribution based on those raises. Hold your salary steady and put more and more into that 401(k). Maybe every quarter or so you put an extra 2%. But don’t say you can’t do it because if you can’t do it now, you’re really going to have a problem in the future. So do whatever it takes. Get up to 10-15%.

The Checklist

So let’s go through a checklist. This is our checkup. Let’s go through a checklist on your 401(k). Investments. How should you invest your money? In an ideal world, you sit down with a financial planner and you come up with an investment strategy. You come up with a long-term financial plan and you adjust that as time goes on. Because, again, financial plans change all the time.

Set up a plan and adjust it based on outside circumstances and your own personal situation. If you can’t sit down with a financial planner, or if that’s intimidating to you, then there are these things inside your 401(k) called target date funds. Pick a date, a year, that you think you’re going to retire and put everything in that target date fund. Then, the 401(k) will adjust the contributions and investments based on that date. The closer you get to retirement, the more conservative they’ll get. When you’re further away from retirement, they’ll be more exposed to the stock market to get the maximum growth.

Rebalancing is the Secret Sauce

In an ideal world, you sit down with a financial planner and get something that’s customized to you. Most people today are taking way too much risk. If you’re close to retirement, chances are you’re taking way too much risk because of what’s happened in the stock market recently. We’ve just been going up and up and up and up. We don’t feel risk anymore because there hasn’t been a bad downturn, or a long-term bear market in a while, although, we might be going through one right now. When we look back at 2010-2020, there really hasn’t been any kind of a big downturn in the market. This includes the year we had COVID where it went down and snapped right back up again. Rebalancing is the secret sauce. That’s why those target date funds automatically rebalance. If you have a good financial plan put together with a good financial advisor, they automatically rebalance your accounts.

Withdrawal Strategy

What’s your withdrawal strategy? Now, you want to think about whether you’re already in retirement or if you’re about five years coming up to retirement. What is your withdrawal strategy? Meaning, what accounts are you going to take your income from in retirement? For instance, should you take money out of your 401(k) and defer social security as long as possible? Should you do the opposite? Maybe take social security out because you don’t have as much control over social security and defer money in your 401(k) and take that income out later? What is your withdrawal strategy when it comes to your 401(k)? Beneficiaries on your 401(k)?


It used to be automatic. You’d put your spouse on if you’re married or if you have a partner. Then after that, it’s the kids or grandkids. Well, that might not necessarily be the right plan because you’re making a decision based on your estate plan. You should have an estate plan based on who needs money and taxes, which are huge. You may want to make sure that your beneficiary is not your spouse and that’s where a trust comes in. Maybe your spouse has enough money, so you skip right to the kids or the grandkids when you pass away. It’s important you put some thought into this. Most of us made these default beneficiary designations when we were younger. “It’s always my spouse and then it’s my kids after that.” You might be creating a tax time bomb by not adjusting those beneficiary designations. Then something magical happens at age 59.5, and at age 55, and there’s another one called free up tax money.

The Magic Numbers

When you hit age 59.5, and some plans, age 55, they give you the opportunity to roll money out of that 401(k), into an individual retirement account. That’s a tax-free transaction, but now you have flexibility and control. Remember, when you have money in a 401(k), you’re not the client. The company is the client. Let me say that again. When you have money in a 401(k), or a 403(b), that company you work for is the client. So if you work for, let’s say, Lockheed Martin, and you have money in Lockheed Martin’s 401(k). Lockheed Martin is the client there. You’re not. You roll that money out of the 401(k) and now you are the client.


Whether it’s the client directly with the provider, like Fidelity, or Vanguard, or whether you have a financial advisor, you are now the client. There’s a better level of protection as a fiduciary deals with your account. At age 59 in almost every plan, and some plans at age 55, you can do a rollover, even though you’re still working for that company. I would suggest you consider that. It gives you more flexibility and control, and you may be able to free up tax-free income. What do I mean by that?

Many of you have 401(k)s where you’ve got after-tax contributions. It might have happened because you put too much money in one year and they had to flip pre-tax to after-tax, or because you just made after-tax contributions for a while, but now they’re trapped in this 401(k). You have pre-tax money that’s all tax-deferred, and you have this after-tax money that’s trapped in that 401(k). If you do a rollover of that 401(k), the after-tax money, the money you’ve already paid taxes on gets freed up and separated out. You may also be able to do a Roth conversion. It gets a little technical here, but the bottom line is you have some options that most people don’t even know they have. Most of the time when we deal with clients, we combine old 401(k)s. We don’t leave them behind at the old company, we roll them over into an IRA.

In Conclusion

There’s a lot here that we’ve covered, but as far as the 401(k) checkup, think about your contributions. What type of contributions are you making and how much are you contributing? And then let’s go through that checklist, your investments, your risk and rebalancing strategy, your withdrawal strategy. Don’t just take it for granted. Beneficiaries. Chances are you ought to update those beneficiaries. The magical things happen at age 59.5 and at age 55. And of course, freeing up those tax-free dollars. Those are all the things that you need to make sure you’ve got in place to be an effective 401(k) investor.

  • Sandy and Thomas C.
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