1. How Much You Should Contribute
It’s easy to assume that you should contribute to your 401(k) plan and contribute as much as you can, but that’s not always true. There are times when it may make sense to not contribute. You need to consider your other savings plans, the availability of company match, and taxes.
A simple rule like “contribute 10%” of your salary may not be suitable for everyone. It may not be enough for high-income individuals, and it may be too much for low-income individuals. By age fifty, you should be confident that the amount you save is appropriate for your situation. If you’re unsure of the right contribution amount, it may be time to get a retirement planner to help you figure it out.
2. How to Invest
Research shows that people spend more time planning their vacations or shopping for a new car than they do planning for retirement. Some people mistakenly assume that if they’re trying to catch up for lost time, they may need to take on more risk and invest aggressively. This is not a good idea.
What is a good way to invest this part of your money? If you’re not sure what to do, use three guaranteed ways to invest your 401(k) funds: target-date funds, balanced funds, or model portfolios.
Those options automatically diversify the funds for you and protect you from choosing the wrong funds that had the highest returns last year. Investing based on past returns is not a wise approach.
3. The Impact of Vesting on Your 401(k) Plan and What It Means for You
If you’re considering changing jobs or retiring before deciding when to make the change, read up on vesting in your 401(k) plan. Vesting refers to the amount of money that your employer contributes to the 401(k) plan on your behalf that you can take with you. Sometimes, waiting a few months to make the change may mean you’ll get more.
Your company may contribute to a profit-sharing program every year, but you’ll need to be an employee on the last day of the year to be eligible. You should know this before you choose your retirement date. Take the time to find out what you need to do to be eligible for the most benefit.
4. What to Know Before Withdrawing Money from Your 401(k) Plan
People make big mistakes when they withdraw their money from a 401(k) plan. You may think it’s okay to withdraw an old plan to pay off debts, but that might be one of the worst things you could do. That’s because 401(k) funds are protected from creditors. By withdrawing them, you may lose that protection.
There are also specific withdrawal rules related to age fifty and fifty-five that you need to know. Many plans offer penalty-free withdrawals between ages fifty and fifty-five only if you retire after turning fifty and if your money remains in the plan. Withdrawing money from the plan can eliminate the option to access it without penalty, resulting in a 10% tax.
Options to avoid this outcome include rolling over your 401(k) plan into another retirement option, such as a traditional IRA that you control. If you’re in this situation, it’s wise to discuss this option with a tax professional before withdrawing the funds.
5. What Happens to Loans Against Your 401(k) Plan?
If you leave your job and have a loan against your 401(k) plan, did you know that the entire loan can be treated as a distribution to you and reported as taxable income? Penalty taxes may also apply. Don’t let this happen. You will want to work toward paying off any outstanding loans before you retire or change jobs.
6.
How to Withdraw Money from the Plan
It’s your money, and you need to know how to use it when the time comes. The rules vary depending on your age and employment status.
For example, if you leave your money in the plan but leave your employer between the ages of fifty and fifty-five, you may be able to access your 401(k) funds without paying the 10% early withdrawal penalty. If you roll it over to an IRA, you will lose this option.
Explore the pros and cons of withdrawing money from your 401(k) plan before making any decisions. In most cases (but not all), it may make sense to roll the money into an IRA, which gives you a broader range of investment options and provides you with more withdrawal methods (some plans do not allow monthly distributions, for example). Also, with an IRA, it’s easier to handle administrative matters like address changes, beneficiary changes, and required distributions once you turn seventy and a half.
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