You have questions. We have answers.
What are the benefits in contributing to my 401k?
A 401(k) is a retirement savings plan sponsored by an employer. Employees can contribute a certain percentage of their income on a pretax basis, meaning this contribution is exempt from current federal income tax and lowers your taxable income. In addition, your 401(k) earnings accrue on a tax deferred basis, meaning you are not subject to the taxes on the capital gains and dividends until you actively take start taking withdrawals during retirement. At this point, you are likely earning less income and thus belong in a lower tax bracket.
Some employers also provide matching contributions to your 401(k) as an additional benefit to employees. It’s like free money! Plus, employer contributions do not count toward your annual contribution limit.
What is a 401(k) Roth contribution?
If you choose to make Roth Contributions to your 401(k), these contributions will come out of your paycheck after you have paid income taxes. Taxes are paid up front so that distributions during retirement can be taken out tax free.
How much CAN you contribute to your 401k?
The IRS limits the amount you can invest in a 401(k). In 2018, the 401(k) contribution limit is $18,500. However, people 50 or older who expect to hit the 401(k) elective deferral limit can contribute an additional sum of up to $6,000. This is known as the catch-up contribution limit.
When can I withdraw money from my 401k?
A 401(k) participant may begin to withdraw money from his or her plan after reaching the age of 59 ½ without having to pay a 10 percent early withdrawal penalty.
What does it mean to be "vested"?
When you contribute money directly from your paycheck to your 401(k), that money belongs to you. However, if your company matches funds they usually vest over time. The vesting schedule can differ but once you are fully vested, you can take the entire company match with you if you were to leave your job.
How much should you contribute to your 401K to meet your retirement goals?
How much you contribute to a 401(k) really depends on your financial situation and whether your employee provides a match. It is best to contribute at least enough to earn all of the matching dollars that your employer offers…it’s essentially free money towards your retirement. However, it is a more difficult decision if your employer does not provide a match. On average you should be saving 15% of your pay across retirement and non-retirement accounts each year. A more precise estimate can be found by using a retirement calculator like this one: click here
Can I borrow from my 401(k)?
Some plans allow you to borrow from your 401(k). It is best to check with your plan administrator or review your summary plan description to see loans are allowed from your plan. However, it is important to understand that the purpose of this money is to fund your retirement. Money borrowed from your plan is no longer earning investment interest until it is paid back. This can impact your account balance over time.
What are my options with a previous employer's 401(k)?
There are several options for an old 401(k). You can leave it where it is and continue to let your money in that plan grow tax deferred. A second option is to roll over the money into an IRA, where again your money grows tax deferred but you may get a broader range of investment choices. Another option would be to roll over your old 401(k) assets into your new employer’s plan. You will need to check with the administrator of your new plan to see if the latter is an option.
How should I invest my 401(k)?
Investing in a 401(k) plan is an excellent way to save for your retirement but depending on your age and financial situation, you may want to assess your risk tolerance to find the best balance of risk and reward for the investments in your account. By identifying your risk profile, suggestions can be made for investments and proper allocations to meet your goals.