For many Americans, a 401(k) is their primary, or only, mode of investing in their future. It seems to be understood by most people that if your employer offers a 401(k), you should definitely take advantage of it by making contributions. But beyond that, many people feel lost. Utilizing a 401(k) to your best advantage involves a lot more than simply making contributions and hoping for the best. Take the time to learn at least these 5 basic facts about your 401(k), and you will begin to understand more about it (and possibly use it to better advantage).
Your 401(k) provides massive income tax advantages. Not only can you save money for retirement; you can save yourself money each year. Contributions are tax deductible, meaning they lower your taxable income each year and help you save money on income taxes. Money within the fund grows free of taxes, and won’t be subject to income taxes until you retire and begin taking withdrawals. At this point your taxable income is likely to be lower. So, your 401(k) can save you a considerable sum each year for decades.
You can contribute more after you turn 50. Right now the annual contribution limit is $18,500, although that amount is periodically adjusted. However, once you turn age 50, you can make additional contributions of $6,000 per year, for a total of $24,500 (currently).
Your employer might offer matching contributions. These benefits aren’t always widely advertised, but many employers offer matching contributions to your 401(k), up to a certain amount. It’s worth a brief phone call to Human Resources to find out!
You can take your 401(k) with you. You don’t have to close the account just because you change employers. You can keep it open, or roll the balance into a new 401(k) or Individual Retirement Account (IRA). Cashing out is often a bad idea, because you will be charged taxes on the money.
Options are flexible, and can make a big difference. Simply making contributions to a 401(k) and hoping for the best is often a mistake, costing you missed opportunities. You can, and should, review your allocations regularly. Over time it might make sense to make changes, so that your investing strategy matches your needs.
Of course, a 401(k) is just one way of preparing for retirement. Give us a call to discuss all of your options, and we can help you identify the ones that make sense for your situation.