10 Things to Know About Your Employer’s Retirement Plan
1. What it is: Your employer’s retirement plan is a defined contribution plan designed to help you finance your retirement. Federal and sometimes state taxes on your contributions and investment earnings are deferred until you receive a distribution from the plan (typically at retirement).
2. Why they call it a 401(k): The 401(k) plan was born more than 40 years ago, under Section 401(k) of the Internal Revenue Code, hence, 401(k).
3. You decide: You decide how much to contribute and how to allocate your investments. This gives you the advantages of easy diversification – a well balanced mix of investment choices, and dollar-cost averaging by making regular investments over time.
4. It’s easy: You contribute your pre-tax dollars and lower your taxable income by making automatic payroll deductions. It’s a simple method of disciplined saving!
5. Know your limits: In 2022 you can save up to $20,500 of your pre-tax dollars. If you are age 50 or older, you can save an additional $6,500.
6. “Free” money: Many employers will match some of your contributions. This is FREE money and a great incentive to contribute to the plan.
7. Vesting: Should your employer make a matching contribution, vesting refers to the percent of your employer contributions that you have the right to take with you when you leave the company.
8. Borrowing: Some plans allow you to borrow a percentage of your account value. Keep in mind that you have to make regular payments plus interest on the loan.
9. Early withdrawals: You may be able to take a lump-sum payment before you retire, generally for emergencies (hardships) only. You’ll pay a 10% penalty and federal and state income taxes. While this is good for emergency situations, your retirement plan is a retirement savings fund, not a rainy day fund!
10. Leaving the company: Get with your financial advisor to discuss your 401(k) plan options if you plan to change companies or exit the workforce. You typically have 4 options and may engage in a combination of these options:
- You may leave the money in your former employer’s plan, if allowed
- Roll over the assets to your new employer’s plan, if allowed
- Roll over to an IRA
- Cash out the account value
Both employer plans and IRAs typically involve a variety of expenses and/or fees. Investment-related expenses may include sales loads, commissions, the expenses of any mutual funds in which assets are invested and investment advisory fees. Plan fees typically include plan administrative fees (e.g., recordkeeping, compliance, trustee fees) and fees for services such as access to a customer service representative. In some cases, employers pay for some or all of the plan’s administrative expenses. An IRA’s account fees may include, for example, administrative, account setup and custodial fees. Learn more about your employer plan and/or IRA by scheduling an appointment here.
Jake Kopczyk, AAMS®
Financial Advisor
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