Most employers offer 401(k) plans to employees as a means of encouraging savings for retirement. Some are generous enough to offer matches, although there are fewer of those today than in the past. Even if you’ve been contributing to a 401(k) for a while, you might still have questions, as discussed in USA Today’s article titled “401(k) limits: 7 answers to your top retirement plan questions.”
Allow me to summarize the 7 questions for you with a brief comment about each one in case you can’t read through the entire article. Here are the 7 questions…
- When can I start building my 401(k)? Some employers let you start with your first paycheck, while others have a certain waiting period. The key is to enroll as soon as possible to get your money growing.
- How much should I save? This is a very personal question and depends on what stage in life you are currently in. For example, if you are just starting out you might not want to put as much away since you want to save some cash for the down payment on a house. If you are nearing mid-career and high earnings you might want to adjust your savings rate. If you get a raise and you are able to do so, increase your savings. If you start by saving 5% of your salary, move up to 10% when you’re more established in your career, then closer to 15% when retirement is on the horizon.
- What about taxes? Most 401(k)s are “tax deferred,” which means that your contributions are made with pre-tax dollars. If you contribute $250, your take-home pay is reduced and so is your tax burden. Note that you don’t pay taxes on capital gains, interest or dividends. However, the IRS does take its share, when you withdraw funds during retirement.
- When do I withdraw my retirement money? You can start taking withdrawals from your 401(k) any time after age 59½. However, you’ll have to pay income taxes on any money withdrawn from your account. If you are younger than 59 ½ you must pay income taxes PLUS a 10% early withdrawal penalty. That’s a retirement no-no. You can take a loan from your 401(k)—$50,000 or half your total savings, whichever is lower. However, you must pay yourself back with interest. Penalties can add up quickly, so only do this in an emergency.
- How much can I sock away? If you’re under 50, you are limited to a contribution of $18,500 in 2018. If you are over 50, an additional $6,000 is allowed to help you catch up.
- Can I save more? You might be able to use a traditional IRA or a Roth IRA. It depends upon your age and your income level. Talk with an estate planning attorney about how to best structure your savings to max out retirement savings and tax benefits.
- What if I get a new job? If you have saved more than $5,000, you can leave the money in the account. However, don’t forget about your 401(k). If it’s less than that, your old employer will want you to roll the money into a different retirement account. If you don’t respond to their request, it’s possible that they will send you a check, minus taxes and early-withdrawal penalties. Don’t lose money because you forgot to transfer your money!
There are certainly more questions relating to how you might want to construct a retirement plan from a legal, financial, and accounting perspective. Your estate planning attorney can serve as a great “quarterback” to help you navigate through this and they can interact easily and effectively with any of your other advisors. If you don’t have other advisors, they can connect you with some that are well respected and trusted.