How a 401(k) plan (which may be employer-matched), could help you prepare for a comfortable retirement.
There can be a lot of confusing numbers floating around when you try to invest: 529s, 401(k)s, and 403(b)s. But your goal to retire in comfort is probably very clear. General George S. Patton once said, “I always believe in being prepared,” and while he may not have been talking about retirement specifically, his objective transfers well.
So how can you prepare to live out your retirement years comfortably? Retirement preparation has often been compared to a three-legged stool – consisting of Social Security (public), your own investments and savings (private), and some sort of employer-directed retirement plans, such as a pension plan or a 401(k). No matter what political party you come from, you probably realize you shouldn’t rely too heavily on Social Security for retirement. Your personal savings are extremely helpful, but the beauty of an employer-sponsored retirement plan, such as a 401(k), is that employers often make some sort of matching contribution. That’s free money for your retirement!
401(k)s got their start back in 1978 when the IRS established a new provision allowing employees to defer some of their compensation into a retirement account with their employer. Employer matches come in a wide variety of options, depending on the employer’s discretion. Some employers match contributions dollar for dollar. Others match 25 or more cents on the dollar. Frequently, an employer only matches a certain percentage of employee salary.
When you first enroll in a 401(k) plan, you’ll be given a list of investment options. It’s best to sit down with a financial professional and figure out how you wish to invest your money. Your options for investments can vary from quite conservative portfolios to aggressive portfolios. You are usually able to allocate your money into different combinations of investments, depending on how much growth potential you’re seeking and how much risk you can tolerate.
All the contributions you make to a traditional 401(k) are on a pre-tax basis.* By deferring money to your 401(k) before taxes, you not only avoid paying taxes now, but you reduce your amount of taxable income. You will have to pay federal and state income taxes when you withdraw from your 401(k), but there’s always a chance you’ll retire in Florida or another state which doesn’t have a state income tax. According to the IRS, other states with no income tax include Alaska, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
The government sets limits and rules for 401(k)s that apply to switching jobs, borrowing from your account, and the penalties that may be incurred if you withdraw early from the account. Many companies have their own restrictions on what can and can’t be done with your retirement fund. As soon as you enroll in a 401(k), you should receive a Summary Plan Description from your employer. If not, ask for it. This will describe your retirement plan and the options available to you regarding withdrawals, rollovers, and collections. You may want to share this document with your financial professional, so the two of you can decide what options fit you best when planning for the future. As with most financial planning, a little education goes a long way and knowing the details of your plan could help make future job transitions a bit smoother.
A 401(k) isn’t the only option for retirement, but it’s definitely one of the most attractive. In many cases, it offers free money and is relatively easy to roll over when you change jobs. A financial professional can help you prepare for retirement with a 401(k) that fits your current investment style and stage in life and adapts to changes in career or investment styles. A small amount of effort on your part and the help of a financial professional might just make General Patton proud.
*Some employers also offer Roth 401(k)s.
Securities offered through Securities America, Inc., Member FINRA/SIPC. Joseph Davis, Registered Representative. Tax services provided by Davis Tax & Associates. Advisory services offered by Beam Asset Management. Joseph Davis, Investment Advisor Representative. Davis Financial LLC, Beam Asset Management, Davis Tax & Associates, and Securities America, Inc. are separate, unaffiliated entities.
Written by Securities America for distribution by Joseph Davis, EA, CDFA ®, BFA™.
“Securities America and its financial services professionals do not provide tax advice. Please consult with your tax professional regarding your individual tax situation.”