There are a lot of investment tools to choose from in the United States when planning for retirement, but no one is more popular than the employer-sponsored 401(k). When an employee starts a new job, one of the first decisions he or she may have to make is whether to participate in the 401(k) plan. We advise you to start saving in the 401(k) because the earlier, the better.
However, no matter how old you are, it is never too late to start saving in your 401(k) and strengthen your future retirement security. With that said, here are some of the things you need to know about this retirement plan.
What is a 401(k)?
The 401(k) is a retirement plan provided by the employer that gives employees the option to contribute a percentage of their salary on a tax-deferred basis. Though this depends on your financial needs and target retirement date, you can select the type of investment funds within the plan, which makes a fiscal sense to you.
Moreover, a subscriber can select how much of their paycheck they want to invest and how often they want to contribute throughout the year. This investment can grow over time, and you may be able to withdraw the funds when you turn 59 ½ without penalty.
Investing Your 401(k) Fund
The way you assign your money is very important to its long-term growth. And over time, this strategy should change. When you are younger, you can invest aggressively and invest more of your plan in equities. As you near retirement, it becomes paramount to protect the principal. To reduce risk, a small percentage of the fund would be invested in equities, and some would go to investments such as stable value funds and bonds, which are generally less volatile.
Moreover, income-producing assets like bonds and rental property will help provide distribution for the rest of your life. Contact a reputable financial planner like The 401k Plan Company if you’d like a second opinion about how to manage funds and invest.
The withdrawals of 401(k) are taxed just as ordinary income. If you haven’t reached 59 ½ before requesting for withdrawal, a penalty of 10% will be assessed on the amount you plan to withdraw. So, it is important to talk to your 401(k)-plan provider, financial advisor, or tax professional if you want to withdraw early.
Tax Deductions and Contribution Limits
For 2020, the maximum amount of salary that you can defer to your 401(k) plan is $19,500. You can make an extra “catch up” contribution of $6,500. Since these contributions are above the line tax deductions, your taxable income will be immediately reduced. For instance, if you are in a 24% tax bracket and make a $1000 contribution, you’ll save $240 in taxes.
Save more for Retirement When you Hire a Reputable Financial Planner
The 401k Plan Company can help you reach your long-term financial goals. We have been vetted and legally bound to act in your best interests. So if you are ready to have greater control over your financial life, contact us today to get started.