You’re probably aware of 401(k) plans — and may have even heard how they can give you a leg up on your retirement goals. If you have a 401(k) available to you through your job, however, you might still want to know more. Let’s look at some answers to frequently asked questions about your employer-sponsored retirement plan.
Q: Why is a 401(k) better than a savings account?
A: For the most part, a traditional savings account doesn’t offer tax advantages. A 401(k), though, allows you to put money aside for the future before you pay taxes on it. You also don’t have to pay taxes on investment earnings from the account as they come. Instead, you only pay taxes when you withdraw from your 401(k) during retirement. By then, you’ll hopefully be in a lower tax bracket.
Q: How can a 401(k) improve your retirement readiness?
A: Since your 401(k) is an investment account, you can take advantage of the considerable benefits of compounding returns, which can allow your money to grow at a faster pace than it would in a traditional savings account. This can help put you in an accelerated position to achieve your retirement dreams. Plus, having the money deducted from your paycheck automatically makes it easier to stay consistent with your investment goals over time — you can build wealth without having to think about it as much.
Q: What are the risks of participating?
A: Market volatility is always a possibility, so it’s important to understand your personal risk tolerance and create an investment plan that works for you. It’s also why it’s critical to review your retirement plan regularly and rebalance your asset allocation as needed.
Q: Are there other advantages?
A: Your employer might offer a match, providing you with a way to put even more money into your retirement account. Additionally, your employer might give you the option of a Roth 401(k), which can result in lower taxes during retirement. Carefully consider your tax situation and individual needs when deciding if a Roth 401(k) makes sense for you.
Q: What if I quit my job?
A: Money you put in, plus your investment earnings, stay with you no matter what. Money your company puts in becomes yours based on a vesting schedule. You can roll your 401(k) over to a new employer-sponsored retirement account or an IRA if you leave your job.
Q: How much do I need to contribute?
A: Work with your qualified financial professional to figure out how much you need to meet your specific retirement goals. You decide how much you put in from 1% of your salary up to the annual contribution limit. Some retirement plans also allow you to automatically increase your contributions each year, or you can bump up your deferral rate when you receive a promotion or bonus. Consider what you should set aside each paycheck to help you achieve your long-term goals.
Q: When is a good time to join?
A: Sign up for your 401(k) as soon as you can. Put time on your side when it comes to reaping the benefits of compounding returns. There can be significant opportunity costs by sitting on the sidelines too long, which can hamper your retirement readiness over the long term.
Q: How do I sign up?
A: Contact your company’s HR department for help opening your account and setting up payroll deductions. Enrolling isn’t hard at all — and it can be one of the most important items to check off on your to-do list in order to help ensure a more secure financial future. The specifics of 401(k) plans can vary from company to company, and there’s more to know than what we’ve covered here.
Contact your qualified financial professional if you have additional questions or to learn more.