401(k) Tips

Did you know that 401(k) contributions are tax-deferred? This doesn’t mean that this money is tax-free, but it does mean that you get to defer tax due on your contributions until you’re ready to take distributions. Not only are your contributions tax-deferred, but so is any growth on your investment.

Because your 401(k) contributions are taken before taxes, your gross income is reduced, reducing your taxable income today. When tax is finally due upon taking distributions in retirement, it may be at a time when you fall into a lower tax bracket!

Perhaps the most valuable benefit of any 401(k) plan is employer matching. When offered, your employer will match contributions up to a certain percentage of your annual salary – a figure that typically falls in the 2 – 7% range.

Under such circumstances, there’s no reason not to take full advantage of your 401(k) plan. You’re earning free money! You should be looking to contribute at least as much as your employer is willing to match. Depending on the fund, you may look to invest even more money than your employer can match. After all, 401(k) plans have much higher annual contribution limits than many other retirement planning options.

Saving requires discipline and patience. Do you struggle to put money aside for later in life?

If so, you’re not alone. But there’s still hope: the best time to start saving is now. But a 401(k) is not your typical savings account. It’s a retirement plan, and it’s not easy to access 401(k) funds without incurring heavy early withdrawal penalties. This plays to your advantage, however. You have few options other than to simply sit back and watch your money grow!

Every retirement scenario is unique. Some retirees only want the simple life, while others want all of the bells and whistles. There’s no wrong way to retire. But it’s important to have clear goals so that you can plan accordingly. Your retirement lifestyle should determine the vehicles you use to save and invest during your working years.

If your employer offers a 401(k) plan, you likely received that paperwork back at the beginning of your employment. But it’s never too late to inquire and determine whether a 401(k) plan can be beneficial for you. There are a number of questions you’ll need answered:

• Am I eligible to participate?
• Is there employer matching?
• What is the maximum amount matched?
• What investment options do I have?

A 401(k) plan isn’t for everyone. The benefits largely depend on your employer, age, annual contributions, risk tolerance, and your priorities in retirement. You might not want a tax burden later in life!

This is important! If you have already participated in a 401(k) plan and choose to leave that employer at any point, you can perform a rollover and have those funds transferred into an IRA (Individual Retirement Account). This is an important option that many overlook.

Is a Rollover right for you?