When it comes to retirement, a lot of people are often in the dark. Many are always wondering what retirement life will be like and how they’ll manage to cope with the usual expenses of life without a stable source of income. It not only affects entrepreneurs, but also those who are employed.
Well, one of the secrets to having a comfortable life in retirement is having a plan and putting it in place as soon as possible during your productive years. Yes, planning for retirement is no easy thing, but with commitment and an actionable strategy, it becomes easier and less daunting.
Especially if you’re employed, there’s a huge chance you’re contributing to or have at least heard of 401Ks, the most common retirement plan out there. In this article, we’ll be shedding more light on things everyone needs to know about 401Ks.
1] What’s A 401(K)?
As mentioned earlier, the 401K is a savings account into which an employee diverts a certain portion of their salary in preparation for retirement. In most cases, the employer also contributes a certain percentage to their employee’s 401k plan every month.
According to Ethan Taub this guide on 401k, many employers offer 401(k) matches, which means that your employer contributes an amount matching what you contribute every month.
What goes into your 401K is also untaxed, meaning that the amount remaining from your salary after contributing is what is taxed. Upon retirement, the individual is entitled to the balance available in their account.
2] Contribution Limits
Contributions to a 401k account are defined by certain limits. These limits often change, especially over the past few years. In the US, for instance, the maximum you could contribute from your salary was $19,000 but this has since been revised to $19,500 in 2020, with a maximum joint contribution (employer and employee) of $56,000 and $57,000 respectively.
Folks aged 50 or older, however, are entitled to catch-up contributions of up to $6,500 as of 2020. In a nutshell, understanding your contribution limits can help maximize the figure that goes to your retirement account.
3] Contributing to Other Retirement Plans
Even if you’re currently contributing to a 401K, it doesn’t block you from contributing to other retirement plans. This means that even if you’ve diverted the maximum amount from your salary into a 401K, you can still make additional contributions to other retirement plans provided your total contributions don’t exceed 55,000 (as of 2018).
If you’re looking to maximize your retirement savings by contributing to other retirement plans with a 401k, the traditional IRA and Roth IRA are your two most common options.
4] There Are Some Fees Attached
As much as saving for retirement is key, the sad news is that the associated fees could eat up a significant amount of your retirement contributions by the time you retire.
One thing to note is that the 401k is a fund and has annual operating expenses. In most cases, it all depends on the expense ratio the particular plan gives you, which may include administrative fees in addition to investment fees.
5] You Can Access the Money Before Retirement
There’s one age-old question that most contributors of 401Ks ask, “can I tap into my 401k contributions”? Well, the truth is that you can indeed withdraw your retirement contributions early, but this often comes with an early withdrawal penalty as long as you’re not 55 or older.
In some cases, employers also allow you to borrow money against your 401k contributions at a fee. In this case, the borrowed money is expected to be paid back with interest as well.
6] 401K Money is Transferable
If you and your employer have been contributing to your 401K and it is time to leave the company, you have several options. Apart from leaving the money into your 401K account, you can.
- Transfer the money into an IRA account.
- Roll the money to your new employer’s 401K.
- Take a lump-sum payment.
If, however, your balance is less than $5,000, leaving the money into your old 401K may not be an option. Also, a lump sum payment may come with additional fees, along with up to 20% of the sum withholding for taxes. Also, failing to get the money back to a retirement account within 60 days will render it taxable.
In a nutshell, 401Ks tend to be a bit complex for many people. Navigating through the various processes can be a bit cumbersome and draining, especially if you don’t understand what 401Ks are all about. With the above information, however, planning your retirement using 401(k) and other retirement plans can be easier.
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