Are you planning for your future? With a 401k, saving for retirement is easier than you might think. Retirement is something that many people look forward to, but fewer Americans than ever are investing in saving up for it. With a 401k retirement, you’ll have put money into an account to be invested into stocks and bonds to build up your fortune, hopefully allowing you to retire comfortably. Not all 401k retirement accounts are made equal, however, so you need to be sure that you’ve chosen the right 401k plans that will generate the returns you want. To help you make these decisions, you can ask these questions so that you know exactly what you’re signing up for as you invest money into your 401k retirement.
401k plans are tax-deferred. This means two things. The first thing is that your contributions are deducted from your paycheck before taxes on your paycheck are calculated, saving you money on annual taxes. The second thing is that you don't pay taxes on that income until you withdraw it, ideally when you're older than 59 and one half years of age. A Roth 401k has you pay the taxes up front, allowing you to take on the obligation now instead of at retirement.
How do I start contributions for my plan?
401k plans are offered through your employer. When you start one, you will choose the investments that match your contribution and risk tolerance and then your monthly contribution will be deposited from your paycheck into your 401k. This allows you to continue making contributions without putting too much thought or calculation into it.
Can I still have an IRA?
Yes, you can still have an IRA. A traditional IRA is tax-deferred, like the 401k. You should check with a financial adviser about the tax implications of contributing to both a 401k and IRA at the same time.
Will my company also contribute?
Most companies that offer 401k plans at all do match. The match is usually 0.5% per 1% that you contribute up to a certain percentage. That means if they will match up to 0.5% per 1% up to 6%, you will have a total contribution of $4,500 for the $3,000 that you contributed yourself.
Can I withdraw from my 401K plan without penalty?
You can if you are older than 59 and one half years of age or older. If you are younger than that, not only will you be responsible for the taxes on that income, but you will also owe a 10% penalty. It's best to wait if you can help it.
Can I have multiple 401K plans?
You can, but that doesn't mean that you should. If you have more than one, or you have 401k plans from previous employers that you haven't closed or withdrawn, you might want to consider consolidating them into your current one. This will make it simpler for you to manage and allow you more freedom with your investments.
Is there a limit to how much I can contribute?
This can change from year to year because there are government regulations as well as non-discrimination rules in place. For 2015, the elective limit was $18,000 per annum. The best way to stay on track and accurate is to ask a financial adviser.
What is vesting?
Vesting is your legal right to keep the money that your employer contributed to your 401k. While most companies do contribute, some companies might only let you keep the money that they contribute if you remain employed with them for a certain number of years. That doesn't affect your personal contributions, however. Your contributions are yours forever.