Knowing how to invest in your future is an important step to having a happy and healthy retirement plan. We have put together a little 411 on your 401k investments to hopefully make the process a little easier. Finding out what your employer will match is a first big step to getting started. This will help guide you in the direction on how to approach your 401k, how much to contribute, the difference between a 401k and an IRA, setting up beneficiaries and what to do if you change jobs.
Investing in your plan:
As always, you keep what you have contributed to your 401k as it was originally your money, but you don’t always keep what your employer will contribution on a matched plan. Most companies require you stay an allotted amount of time, called vesting, before they allow you to keep what was contributed by them in the 401K match program, which can be up to 6 years in some companies. Knowing how much your employer will contribute is important as it’s “free” money your employer is giving you. If you can afford it, it’s recommended to contribute the full match amount as you don’t want to miss out on any money your employer is willing to match. The max you can contribute annually in 2016 remains the same as 2015 topping out at $18,000. If you are 50 years or older, you can contribute an extra $6,000 or $24,000. To learn more about this specifically, Money.com.
When can you start:
Some company plans allow you to sign up for your 401k as soon as you start a new job, while others may have the policy of waiting for a certain allotted amount of time. As soon as your employer allows you to sign up, gather all the information need to get started. Contact your companies Plan Administrator and make an appointment with an outside financial advisor to discuss details. Your contribution will be directly deposited into your 401k from your paycheck, so it’s easy and no action is required from you after you’re all set up!
Roth 401k vs. Traditional 401k
Contributions on a traditional 401k are on a pretax basis, meaning your employer will pull your allotted contribution amount from your paycheck before they withhold taxes on your check, but taxes will be owned during any withdrawals. They are usually funded with pre-tax dollars, grow tax deferred but are taxable when withdrawn.
Contributions to a Roth 401k will be made by your employer after they have already withdrawn taxes from your paycheck. Because taxes were already paid at the time of your contribution, taxes will not be owed like a traditional 401k at the time of withdrawal. There is a 5-year rule on Roth contributions meaning they must be aged 5 years before they avoid taxes.
Most 401k contributions through your employer will be traditional meaning you will have your contribution put into your account before taxes are withheld and you will get the tax break almost immediately because less money will be withheld for taxes per paycheck.
401k vs. IRA
401k vs IRA is easy to understand. 401k is an employee sponsored retirement plan, which you can potential qualify for a match program, while an IRA is an account not sponsored by an employer that anyone can contribute to for retire if they are under the age of 70 ½. Both IRA and 401K plans are pre-taxed money.
Withdrawal penalty laws
If any withdrawals are made from a 401k before the age of 59 1/2, there is a penalty associated with this of 10% along with taxes. There are several ways you can use the money you have worked hard to save up. Visit the IRS for the full qualifying list.
Setting up a beneficiary
Setting up your beneficiaries and keeping it updated so the proper people receive your assets in case of your death is key. Reviewing and updating your beneficiaries is needed just in case a life circumstance happens and a change is needed such as a divorce, or beneficiary death. If you do not have beneficiaries set up, your assets will automatically go to your estate. If you are married, by federal law your spouse is automatically the beneficiary unless you name somebody else. In addition, naming children as contingent beneficiaries give them the ability to continue the IRA over their lifetime should something happen to both the IRA owner and primary beneficiary.
Change in jobs
When switching jobs, you have a few options you can do to avoid paying any penalties. You can leave it in the current account if your company allows you to do so, roll over your 401K to an IRA, or transfer it directly into your new job’s 401K plan if the plan allows for it. Talk to an Advisor and look at each individual option and pick one that best suites your needs.