How much do you know about 401(k) plans, yours in particular? You might be surprised to find out how many people with a 401(k) remain unsure about the details of their plan.
401(k) plans are one of the most popular ways people save for retirement, largely because many employers offer them as a benefit. If you work at a tax-exempt operation, such as a non-profit or educational institution, you may be offered virtually the same thing but called a 403(b).
If you don’t work for a company that offers 401(k) plans, there are still plenty of options to look into. Allow one of our CPAs to help you find a retirement plan that works for you.
1. How Much You Can Contribute To Your 401(k)
Workers under 50-years-old can contribute as much as $18,000 per year and still receive tax credits. Employees that are 50 and older can contribute an additional $6,000 ‘catch-up contribution’ per year.
Contributing to your 401(k) offers tax savings benefits, for example if you make $3,500 per month and you put $500 into your 401(k) every month you only pay taxes on $3,000 a month. Employers match a percentage of every contribution you make up to a certain amount.
The retirement issue in America is being called a “crises.” The problem? No one is saving enough to maintain their current lifestyle considering how long people are living these days. Percentagewise, seniors makeup one of the largest groups living in poverty. In other words, the more you can contribute to your 401(k) the better off you’ll be, because you’re going to need it.
Calculate how much you can afford to stash away for retirement every month and stick to it.
2. Are You Contributing Above Your Plan’s Default Rates?
Many 401(k) plans automatically enroll employees unless they opt out. The initial contribution typically starts out small and then “auto escalates” from there. You can always opt out and contribute whatever you want to your plan. But in most cases you want to contribute more than the default rate in order to build up a sufficient nest egg. If you never contribute more than default rates, how much money do you end up with when retirement kicks in? In many cases it’s not enough to retire, or at least not for long. The general rule of thumb is to contribute between 12% and 15% per year.
3. Expense Ratio: How Much Do You Pay In Fees?
Always be in the know about specific fees associated with your account. Some 401(k) plans are loaded with operating expense charges, which can total up to 30% of your entire savings by the time you retire.
Pay close attention to the fund’s expense ratio to see if your plan is costing more to operate than it’s worth. An expense ratio of 1% or less is considered fairly normal.
4. You Have Options
Employers pick a large pool of investment options and from there, employees pick where they want to invest. The Plan Sponsor Council of America reports that on average 401(k) funds include 19 funds to pick from. If you do not make a choice, your money will be invested into a default location. All investment options are not created equally. Take advantage of your ability to choose in order to make the most out of your investments.
5. Is A Roth 401(k) An Option For You?
Some plans offer the option for a Roth 401(k). This type of plan allows you to contribute more money after meeting your tax limits, of which can be withdrawn tax-free in the future after incurring tax-free growth. You have the option to split up your investments between a Roth 401(k) and a traditional plan.
6. How Much Your Employer Contributes
Employers generally match your contributions to a certain percent, often around 4%, and up to X amount of money per year. Some employer contributions immediately become vested in your plan, while others do not technically become ‘your money’ until you have been with the company for a certain amount of time.
If you leave your job for another job, your plan can be rolled over to a different account and the money you contributed over the years should still be there. Depending on the terms you have with your previous employer, employer contributions may or may not roll over. If you have less than $5,000 in your account there’s a chance it will not roll over.
7. When You Can Withdraw Money From Your 401(k) Without Fee
If you retire early or roll 401(k) money into a different retirement account, you will more than likely have to pay the 10% early withdrawal fee. In order to avoid the fee, you’ll have to wait to withdraw money until you are precisely 59½-years-old.
Need help working out the logistics of your 401(k) plan, or need some other retirement solution to maintain your lifestyle long into your golden years? DGK has you covered! Our CPAs are knowledgeable, intelligent and experienced. But most important of all they are dedicated to helping you prepare for a better retirement.