A 401(k) is a type of employer-sponsored retirement savings plan that allows employees to contribute a portion of their pre-tax income to a tax-deferred savings account. This means that contributions are taken from an employee’s pay before taxes are calculated, and the funds grow tax-free until they are withdrawn. Here are some of the key points to keep in mind about 401(k)s.
Employer contributions: Many employers offer matching contributions for their employees, which means that for every dollar an employee contributes, the employer will match a percentage up to a certain limit. This is a great way to maximize the amount of money saved for retirement.
Contribution limits: The annual contribution limit for 401(k)s is set by the federal government and is subject to change on an annual basis based on inflation. Those over age 50 can contribute additional amounts as well.
Investment options: 401(k) plans typically offer a range of investment options, including mutual funds, exchange-traded funds (ETFs), and individual stocks and bonds. It’s important to understand the fees associated with these investment options and to choose wisely based on your investment goals and risk tolerance.
Loan options: Some 401(k) plans allow employees to take out a loan against their account balance, but it is important to understand the terms and conditions of these loans, as well as the potential impact on future savings.
Rollovers: When changing jobs, it is possible to roll over the balance of a 401(k) into a new 401(k) or into an individual retirement account (IRA). This can help to maintain the tax-deferred status of the funds and avoid potential taxes and penalties.
Withdrawal rules: 401(k) funds are subject to penalties for early withdrawal before the age of 59.5 or age 55 if you leave your job and must begin early retirement. It’s important to understand the rules and restrictions surrounding withdrawals to avoid potential penalties and taxes.
A 401(k) is a powerful tool for saving for retirement, offering a range of investment options, employer contributions, and tax benefits. However, it is important to understand the terms and conditions of the plan, as well as the fees and restrictions associated with contributions and withdrawals. By taking advantage of employer matching contributions and contributing the maximum amount possible each year, employees can maximize their retirement savings and achieve their long-term financial goals.
If you have questions about how best to utilize your 401(k) to meet your financial and retirement needs, contact us today for a complimentary review of your finances.
Source: https://www.investopedia.com/terms/1/401kplan.asp
