The 411 about 401(k)s

Brian Clouden – Vice President
Jeffrey Haxton – Certified Financial Planner™

Only 17% of companies now offer traditional company paid pension plans. As such, the responsibility is now on you to save for retirement. A common option for most employees with a full-time job is a 401(k). You’ve probably heard the term but do you know what it is and what options are available to you? Well we’re here to help and let’s start with the basics.

A 401(k) is a retirement plan that may be offered through your employer. If offered, you can decide a percentage that is taken from each of your paychecks to go directly into your 401(k) account pre-tax contributions. During 2018, you’re able to contribute up to $18,500; or if you’re older than 50 you can contribute a maximum of $24,500. In addition some employers offer a match contribution. We highly suggest you take full advantage of the match if you’re financially able. Just be sure to ask if your employer offers a match so you don’t miss out of free money.

You then need to decide how to invest your money. In most cases you’ll have the option to select individual funds or have it all go towards a target-date fund. Earnings will be taxed as regular income when withdrawn during retirement. Some 401(k)s also have a Roth contribution option which will allow your withdrawals during retirement to be tax-free. However with the Roth the money does not come out pre-tax. Typically the younger you are, the more you benefit from the Roth options.

So what happens in the event of changing jobs or when you retire? Well the good news is it’s still your money and you usually have a few options available to you.

1. You may be able to leave it where it is. You won’t be able to contribute to it anymore but it will still continue to grow over time with the funds you have it in.
2. You can roll it into an IRA (individual retirement account). Like your 401(k) your money will continue to grow tax deferred or tax free if it’s a Roth. You will also receive advice from a financial planner.
3. If you’re switching jobs and your new employer allows it, you can roll it into your new 401(k) plan.
4. You can cash it in. This option is not recommended because of taxes and penalty fees. However sometimes this is necessary based on your financial situation and status.

For more on this topic you can listen to our interview on 106.5FM WYRK with Jeffrey Haxton and Clay Moden:

And watch Brian Clouden’s commercial on 401(k) rollovers:

You can catch our weekly Plan.Protect.Invest. segment live on WYRK 106.5FM at 7:10am every Wednesday. Each week we will have a Sgroi Financial planner on with Clay Moden and the WYRK morning show to discuss financial topics to educate and help their listeners.

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