The Informed Investor

For many people who have a 401(k), contributing a small percentage of each paycheck toward it is about all the knowledge they have about the retirement plan. What they don’t realize is that they have an incredible tool at their fingertips that can help them meet their future financial goals.

Your 401(k)can be just another deduction from your paycheck or it can be a smart way to plan for your retirement. The difference comes when you know how to best utilize it.

Here are 6 helpful things to know about your 401(k) plan.

1. Learn About Your 401(k)

Gaining knowledge is the best starting point for creating a bright future.
Before you can do anything, you have to know whether or not you even have a 401(k). Many employers automatically enroll new employees in a 401(k) plan. Some may provide you with paperwork, discuss it and answer any questions. Others just do it, and you don’t even realize it until you see a deduction on your check.
You can’t make the most of your 401(k) plan if you don’t understand the specifics of your plan, the company’s contributions, and how to manage your own contributions.

2. Your Contributions are Tax Free

Though there is no cap on how much you can contribute from each check, but the government does place a cap on the amount you can contribute each year.  The limit in 2021 is $19,500 if you are under age 50. If you are 50 or over, you may contribute an additional $6,500 in 2021. This is called a “Catch-Up” contribution for those age 50 and over. You can make your catch-up contribution spread out over the year or in one lump sum at the end of the calendar year. The rules relating to catch-up contributions are complex and your limits may differ according to provisions in your specific plan. Contact your plan administrator to find out whether your plan allows catch-up contributions and how their catch-up rules apply to you.

3. The Benefits of Employer Matching

If your employer offers contribution matching, why not take advantage of this free money? Generally, most employers will offer to match 50% of the amount you contribute up to 6% of your pay. Typically, employers contribute 3-6% in matching funds.

401(k) plan contributions by your employer are often part of your salary compensation so take advantage of it.

4. You Can Choose How to Allocate Your Contributions from Your Plan’s Choices.

Employers or a company’s investment committee determine which investment choices to make available to employees. You then get to choose from those options. Most 401(k) plans will have a choice of money-market, target-date funds, low-cost index funds, domestic stock or bond funds, and international funds to choose from.

Take time to review the options offered in your plan to ensure you allocate your contributions in a way that will meet your future goals considering your age and your appetite for risk versus more steady investment choices.

5. Emergency Access to Cash in Your 401(k)

By design, a 401(k) is meant to be used as a retirement planning tool. However, life sometimes gets complicated, and having the ability to access this cash can be a lifesaver. Just know that it doesn’t come without a penalty – usually 10% of the amount withdrawn unless you are at least 55 years of age.

Borrowing from your 401(k) is also an option if your plan allows it. You will have to pay a fee and you will almost always be charged interest, but the interest you pay goes into your account. With most plans you repay the loan through payroll deductions. Normally, the loan must be paid back over five years. That is the longest repayment period the government allows. However, if you borrow from your 401(k) for the purchase of your primary residence some plans allow you to repay the loan over 25 years. If a participant has no other plan loan in the 12-month period ending on the day before you apply for a loan, they are usually allowed to borrow up to 50% of their vested account balance up to a maximum of $50,000*.

While it is best not to touch the money in your 401(k) plan before retirement, having this available in case you need it can be helpful.

6. Retirement Withdrawals Must Begin at Age 70 ½

The IRS states that Required Minimum Distributions (RMDs) must commence at the age of 70 ½ years. The distribution amount is based on life expectancy. So, as you get older, the higher your distribution amount will be. Contributions to retirement plans (unless it is a Roth 401(k) or a Roth IRA) are exempt from taxes therefore the money you withdraw from these plans when you reach 70 ½, and thereafter, is taxable as ordinary income. For those looking to avoid this required minimum distribution, continue working. Even if you are over the age of 70 ½, you don’t have to withdraw money from your 401(k) plan as long as you are still employed.

Learn More About Retirement Planning With ICC

Having a team of financial advisors working hard to create a retirement planning strategy that works for you is exactly what you will find with ICC.

If you have $1,000,000 more in investable assets and have questions about retirement planning, your 401(k), or if you are interested in learning more about planning for your future, contact ICC today at (702) 871-8510.

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