Most professionals working in the U.S. have access to a 401K retirement savings plan. While many have access to this plan, Shawn Weera and other financial consultants have taken note that not all individuals understand exactly what a 401K entails. Financial advisors will often have clients come to them with little to no knowledge about their options.
To make financial and retirement planning easier for his clients and all individuals, Shawn Weera has put together a list of some of the top things to know about 401K retirement plans to start saving for the future.
What percentage of your paycheck should go into your 401K?
This is something that you have to decide based on your individuals circumstances because those contributions you put there are made pretax. This implies that the more money you put in there, the more your taxable incomes decreases and as such your tax bill also reduces.
The pretax limit for those under the age of 50 is set at $18,000 while workers that are aged 50 and above have a pretax limit of $24,000. The extra $6,000 for those above 50 is called catch up contribution.
What does your employer contribute to your 401k?
As an employee, it is very important that you know what your employer is putting into your 401k account. There are some employers that will put in the same amount as you while others will just give you a certain percentage of your input.
Some of these contributions by employers come with conditions attached, conditions that you will have to meet before the money becomes yours.
Roth 401K plans or the Traditional 401K plans?
Most employers offer the Roth 401K plans which are totally different in terms of taxation rules to the traditional 401K plans. As a worker, you should keep in mind that the amount you put into your Roth account comes from your post-tax income, therefore withdrawing money from your Roth account means you won’t be taxed, though you will be charged the early withdrawal penalty in most cases.
If it so happens that your employer offers both the traditional 401K and a Roth 401K, it is better to consult your financial advisor before making a decision on which one to go for. If you are just starting your career and your tax bracket is low, then it is better you put your funds in a Roth 401k with your after-tax income, thus paying a lower tax on the retirement plan now. This decision should be made when you know where your tax bracket falls and where you intend to be at the time of retirement.
The moment you understand your own contributions, what your company matches, the investment schedules, and the taxation on your contributions, then it will be easier for you to understand your 401K’s investment options. As a financial consultant, Shawn Weera can work with you to understand your unique situation and decipher the best option for you.
There are some plans that only have a few investment options while others have several of them. You should understand that your investment in a portfolio or a mutual fund should be reliant on your current age and how far you can go in terms of risk. Young people are more risk tolerant than older people.
401K IRA Rollover
When you decide to quit or switch your job, there are four main options available to you. You can decide to cash out even though this is considered a mistake due to the taxes and penalties you will have to pay on your 401K. You can decide to keep your 401K in your employer’s original plan, this is advised if you have an excellent 401K that has really good investment options and low charges.
You can decide to roll it over to your new employer’s 401K. But first, you will have to know if the new company allows you to transfer old balances to your new plan. Also, ensure that the new plan is excellent before you make this move. The last option is for you to roll it over to an IRA. Since the IRA will be yours, you will be able to exercise more control over it. You will have the luxury to choose the company you wish to work with and the portfolio you would like to invest that money.
Investors favor rolling over into an IRA due to the advantages it has such as lower fees. Consult with a financial advisor before you rollover so that you can know the rules and specifics involved.
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