Matchmaker: Maximizing Your Employer 401(k) Contributions
How a 401(k) plan, (which may be employer-matched), could help you fall in love with the thought of a comfortable retirement.
There can be a lot of confusing numbers floating around when you try to invest: 529s, 401(k)s, 403(b)s; it can get hectic. One thing which isn’t confusing is knowing you want the opportunity to retire in comfort. General George S. Patton once said, “I always believe in being prepared,” and while he may not have been talking about retirement specifically, he makes a good point. Be ready.
So what are your best options for being prepared to live out your retirement years? Well, for many years there has been the theory of the three-legged stool in preparation of retirement. The three legged stool consists of Social Security (public), your own investments and savings (private), and some sort of employer involved retirement plan such as a pension plan or a 401(k). No matter what political party you come from, you know you probably shouldn’t rely heavily on Social Security for retirement. Your personal savings are extremely helpful in retirement, but the beauty of the employer sponsored retirement plan, in this case, a 401(k), is that in many cases your employer will 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 to allow employees to defer some of their compensation into an account with their employer. The beauty is that in many cases, your employers will match your contributions to a certain point. 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. That means each time you contribute, your employer adds money, for free! Often times your employer will only match up to a certain percent of your salary. But regardless, they’re adding to your retirement for you!
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 will vary from quite conservative portfolios to aggressive portfolios. You are able to allocate your money into investments in different combinations depending on how much growth potential you want from your investments, and how much risk you can tolerate.
All the contributions you make to your 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, those states, besides Florida, include: Alaska, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
Besides being prepared for retirement, you also want to be prepared with your individual 401(k) and the restrictions and limits placed on it. These limits and rules can apply to switching jobs, borrowing from your account, and the penalties that may be incurred if you withdraw early from the account. As soon as you enroll in a 401(k), you should receive a Summary Plan Description. Your employer should provide it to you. If not, ask for it. This will describe your retirement plan and the options available to you regarding withdrawals, rollovers, and collections. You 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. Many companies have restrictions on what can and can’t be done with your retirement fund. 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.
401(k)s aren’t the only option for retirement, but they’re definitely one of the most attractive. In a lot of cases, they offer free money and are relatively easy to roll over when you change jobs. You also have the convenience of deferring taxes and paying less each year to the government. Social Security probably shouldn’t be relied upon, and personal savings don’t often give you the chance for free money, so it only makes sense to participate in your employer’s 401(k) to add to your retirement plan.
By sitting down with a financial professional, you can help ensure you’re prepared for retirement with a 401(k) that fits your investment style and your stage in life. You can also make sure that your financial well-being is prepared for any changes of career or investment styles by working with someone closely to handle it all with ease. Who knows, with a small amount of effort working with your financial professional, your preparation might even make General Patton proud.
Securities offered through Securities America, Inc. Member FINRA/SIPC. Jose R. Rodriguez, Financial Consultant. Advisory Services offered through Securities America Advisors, Inc. An SEC Registered Investment Advisor, Jose R. Rodriguez, Investment Advisor Representative. Rodriguez Financial Strategies LLC and the Securities America companies are unaffiliated. Written by Securities America for distribution by Jose “Rafi” Rodriguez, Retirement Income Certified Professional®. SAI#1123483.1