As pension-style retirement plans have fallen by the wayside, the 401(k) plan has become the go-to option for many companies looking to help employees save for retirement. The 401(k) enables workers to set money aside, and not pay taxes on it or its earnings, until they retire and begin withdrawing funds from the account. Here are some key things you need to know about these tax-advantaged accounts.
One of the best things about tax-deferred retirement accounts like the 401(k) is that you make contributions pre-tax, so in addition to saving for the future, you’re reducing your income taxes right now. But there are limits, set by the IRS, to how much you can put away each year. For 2016, the limit is $18,000; however, if you’re 50 or older, you can set aside up to $6,000 more per year in “catch up” contributions.
If your company automatically enrolls employees in their 401(k), the default contribution amount probably won’t be anything close to the maximum, but you can probably elect to contribute more. If contributing the maximum is not doable right now, one smart strategy is to funnel any future salary increases into your 401(k) until you reach the maximum contribution.
As part of their employee benefit package, many companies will match employee contributions to a 401(k) up to a certain percentage. For example, say you make $50,000 a year and your company matches up to 3% of your salary. When you contribute 3% (that’s $1,500) to the 401(k), the employer match of that amount boosts your annual investment to $3,000. If your employer offers matching funds, be sure to contribute at least as much as you need to get the full match. Otherwise, you’re leaving money on the table.
Any money that you contribute to your 401(k) is completely owned by you, from the start. Though your investments may go up or down, you still own it when you leave your employer. Some companies, though, impose “vesting” requirements on the matching funds they contribute to your account. They may, for example, require you to stay employed for a set amount of time before you’re entitled to (or “vested” in) the funds they contribute to your account. So, if you leave your job before fulfilling your employer’s vesting requirements, you may receive only a portion (or none) of the matching funds.
Most 401(k) plans have several options for investing your retirement savings and some may even offer the services of a financial advisor to help you choose the right mix for your age and investment goals. As a general rule, though, the younger you are, the more risks you can take because you have more time for make up for potential losses. As you get closer to retirement, you’ll probably want to shift toward more conservative investments. Whatever your age, though, it’s important to be diversified – which is just a fancy way of saying “don’t keep all your eggs in one basket.”
Hanscom Investment Services is available to assist you with your financial goals, including retirement savings. Learn more about the many financial services offered here.†
†Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. Hanscom Federal Credit Union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using Hanscom Investment Services, and may also be employees of Hanscom Federal Credit Union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, Hanscom Federal Credit Union. Securities and insurance offered through LPL or its affiliates are:
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