Saving for Your Retirement: 401(k) Plans
Key strengths
- You receive “free” money if your contributions are matched by your employer (subject to your plan’s vesting schedule)
- You decide how much to save (within federal limits) and how to invest your 401(k) money
- Your regular 401(k) contributions are made with pretax dollars
- Earnings accrue tax-deferred until you start making withdrawals, usually after retirement
- Your Roth 401(k) contributions (if your plan allows them) are made with after-tax dollars; there’s no up-front tax benefit, but distributions of your contributions are always tax free and, if you satisfy a five-year waiting period, distributions of earnings after age 59½ or upon your disability or death, are also tax free.
- You may qualify for a partial income tax credit
- Plan loans may be available to you
- Hardship withdrawals may be available to you, though income tax and perhaps an early withdrawal penalty will apply, and you may be suspended from participating for up to six months
- Your employer may provide full-service investment management
- Savings in a 401(k) are exempt from creditor claims in bankruptcy (but not from IRS claims)
Bear in mind…
- 401(k)s do not promise future benefits; if your plan investments perform badly, you could suffer a financial loss
- If you withdraw the funds prior to age 59½ (age 55 in certain circumstances) you may have to pay a 10 percent early withdrawal penalty (in addition to ordinary income tax)
- The IRS limits the amount of money you can contribute to your 401(k)
- Unless the plan is a SIMPLE 401(k) plan, a safe harbor 401(k) plan, or the plan contains a qualified automatic contribution arrangement (QACA), you may have to work for your employer up to six years to fully own employer matching contributions
Investing for Retirement
Keep in mind…
- A well-diversified portfolio can help balance risk
- The earlier you start investing, the more you can contribute over the course of your working lifetime
- By starting early, your investments will have a longer period of time to compound
- With a longer time frame, you will have a larger choice of investment possibilities
What to do…
- Assess your risk tolerance
- Determine your investing time frame
- Determine the amount of money you can invest
- Choose investments that are appropriate for your risk tolerance and time horizon
- Seek professional management, if necessary
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Not Insured by any Federal Government Agency | May Loose Value Including Loss of Principal