A 401K is a great way to save for retirement. It is essential, however, that you understand the ins and outs of this investment tool. By learning more about it, you can ensure that your money is growing at a maximum level. Almost 80% of US workers have a 401K, but each plan is unique. Learning more about how your plan is managed is essential. What do you need to know?
Does Your Company Match Contributions?
Many companies match a certain percentage of your contributions up to a certain amount. Understanding the maximums is important, as this match can help your 401K to grow much quicker. Some companies have an annual contribution limit, or the plan may limit you. Your goal is to contribute up to the maximum of the amount your company will match. However, going over that amount could end up costing you more.
What Are the Options for Investment?
Most 401K plans allow for a choice of investments. The selection may include a variety of different investments, including stocks, bonds, mutual funds, and guaranteed investment contracts (GICs). If the options are not favorable to you, you might be able to transfer a percentage of the 401K into another retirement account. Decide whether you want to invest more aggressively (more risk) or more conservatively (less risk). Some plans offer a full brokerage option, which allows you to choose your mutual funds for maximum financial increase.
How Long Do You Have to Stay With the Company to Be Vested?
While the money you put into the 401K is always yours, the matching funds and the proceeds from your investments are not. You want to know at what point you are 100% vested. Many companies have graded vesting where you gain a percentage of vesting each year, but others have cliff vesting, which is where you are not vested until you meet the vesting requirement (could be as little as two years, but usually more). Ask your company benefits manager which one that your employer offers.
When Can I Withdraw the Money?
Most plans impose a penalty tax (as well as income taxes) if you make a withdrawal before you are 59 and a half. Some situations or conditions allow for withdrawals without a penalty, but these will vary from employer to employer. Some of these exemptions include:
- Becoming disabled
- Your death (distribution made to your beneficiary)
- Some medical expenses
- First home purchase
- College Expenses (for you or any member of your immediate family, including your children)
- To avoid foreclosure or eviction
- To pay funeral or burial expenses
- Some home repairs
If you wait to withdraw until you are older than 70 and a half, you will need to make a required minimum distribution from all your 401Ks. This means that you have to begin withdrawing from your plan by April 1st of the year following the one you turned 70 and a half. They take your age, life expectancy, and the amount you have in your account to determine the required minimum distribution. Then you will begin to get a check each month for your minimum distribution amount.
Choosing a 401K plan can seem very overwhelming, but it is vital to learn as much as you can and start participating as soon as possible. This allows for maximum financial benefits when you retire to allow you to enjoy your retirement just the way you always imagined.