401(k) accounts have become the most popular employer-sponsored retirement plan in the USA. Only a few other programs or benefits can match the flexibility of the 401(k) plan. Millions of employees depend on the contributions made to this account for their retirement years.
Lance Ippolito is a master trader with great zeal to educate others on making the best financial decisions. Below, Lance Ippolito shares what you should know about your 401(k).
How Much Should You Contribute To Your 401(k) Account?
The amount you contribute to your 401(k) account depends on what you can afford. It is, however, advisable to take full advantage of whatever percentage your employer is willing to match. If possible, you should try to max out your 401(k) account annually.
When you take on new responsibilities like starting a family, paying college funds, or medical emergency expenses, you might not be able to contribute as much as you used to and need to decrease it. But you can also increase your contributions when you get your pay.
How Does Leaving The Job Affect Your 401(k) Account?
If your account balance is less than $5000, your company might send you a check or remove you from their plan. If you, however, choose to receive the check and cash the money and are younger than 59%, federal and state taxes will be imposed on it along with a 10% penalty by the IRS. However, you can choose to roll this money into a new 401(k) plan or an IRA.
What Happens If You Need To Withdraw From Your 401(k) Account Before You’re 59½?
If you withdraw from your 401(k) account before the specified age for retirement, you will attract federal and state taxes, along with a 10% penalty imposed by the IRS.
However, you can withdraw for free if you’re disabled or qualify for a hardship withdrawal. To know if you qualify for a hardship withdrawal, you can discuss it with an IRS representative, a financial advisor, or an accountant.
What Are The Limits To A 401(k) Contribution?
The maximum amount you can defer to your 401(k) account, traditional or Roth, is currently $20,500. Those above 50 years can add catch-up contributions of up to $6500.
For joint contributions by employers and employees, the maximum contribution is currently $61,000. At the same time, those 50 years and above can contribute up to $67,500.
What Are The Investment Options With A 401(k) Account?
Companies that offer 401(k) plans usually allow employees to invest several funds. These options are typically managed by a financial services advisory group. You get to choose one or several funds to invest in.
Most of the options are mutual funds. They may also include; index funds, foreign funds, large-cap and small-cap funds, bond funds, and real estate funds.
Each plan is different depending on your stomach for risk. Your choices might vary from a fund with a higher percentage of stocks to bonds or vice versa. They also range from conservative income funds to aggressive growth funds.
To maximize your 401(k) funds, you must choose an investment that suits you best and optimize them from time to time. You can discuss with a financial advisor for advice on what plan is best for you.