A 401(k) is a retirement savings plan sponsored by an employer that allows workers to save and invest a portion of their paycheck before taxes are taken out. While many individuals are familiar with the basics of this type of savings, there may be some details you don’t know about which may significantly impact your long-term savings strategy.
A 401(k) may lower an individual’s taxable income because contributions are made with pre-tax dollars. A lower taxable income could help you qualify for other tax benefits, such as educational credits or a larger home mortgage interest deduction.
Your employer may offer a matching contribution. Most employers offer to match contributions up to a certain percentage which is essentially “free” money and should definitely be taken advantage of. This allows your money to grow faster because there is more of it going into an account that is growing tax deferred.
Did you know if you change jobs or are terminated that your 401(k) doesn’t have to stay with your former employer? Contributions into your 401(k) will stop, yet fees charged by the servicer will continue which can have a significant impact to the growth of your account over the long run. Talk with a Financial Professional to see what your options are to take control of your account. An Individual Retirment Account (IRA) may provide a broader range of investment options and lower fees that many employer sponsored plans.
If contributions into a 401(k) were made with pre-tax dollars, and the individual is not 59 1/2 years old, and they cash out their 401(k) instead of rolling it over to an IRA, taxes will be due on the contributions and accumulation plus a 10% penalty for early withdrawal on the amount distributed. These taxes and penalties can result in a significant hit from your retirement savings.
If contributions were made with after tax dollars, depending on the account type and how long it has been open, distributions may be tax and penalty free. Contact your 401(k)-plan administrator to determine what penalties may apply for early distributions.
However, there are exceptions to the penalty, including distributions made after a disability, certain medical expenses, etc. A tax professional or financial professional can help you understand if your specific situation may apply.
There are yearly contribution limits, and the limits can change annually. For 2024 the limit is $23,000 for those under age 50, and $30,500 for those age 50 and over. These limits include both your contributions and those made by your employer.
Understanding these facts about 401(k)s can significantly impact your retirement savings strategy. Maximizing tax benefits, taking full advantage of employer matches, and carefully considering 401(2) transfers and withdrawals may help you accumulate a suitable neg egg for your golden years. Schedule a consultation with Brightside Financial today to see how we can help you maximize your savings.
What if you are self-employed or your employer does not offer a 401(s) plan? When it comes to saving for retirement it is essential to start early to ensure a comfortable retirement. Contact Brightside Financial today to find out what your options are to set up a non-employer sponsored retirement account.
