One of the easiest ways to save for retirement is through a company sponsored 401(k) program. You’re usually informed of whether or not your company offers this type of retirement savings when you first gain employment or when you’re eligible to start participating in employee benefit programs. While a 401(k) may seem pretty straight forward, you have different investment options to choose from most of the time and you also have the choice of how much of a percentage of a pay that you put into the account. The Financial Guys of western, New York can help you make these decisions in order to help you meet your retirement goals.
How does a 401(k) work?
When your employer offers a 401(k) plan, they are responsible for setting up the conditions of the program and the investments that you can select from. Once you’re eligible to participate in the 401(k), your employer will give you a packet of information that shows which investment choices you have.
The next step to the process is deciding how much of your wages you’re going to invest in your 401(k). 401(k) deductions are taken out of your paycheck pre-tax as a deduction. Your employer may also match your 401(k) amount up to a certain percentage but not every employer does this and how much they match will also vary by employer.
Your money then stays inside of your 401(k) account as you continue to build up funds through your payroll deduction and possible employer match. Since the money you deposit goes towards the investments of your choosing, the amount of money in your 401(k) can fluctuate with the market.
Can I use the money in my 401(k) for other stuff?
The purpose of a 401(k) is to save for retirement, therefore it’s best to leave the money in there. On top of that, many employer sponsored 401(k) plans do not allow withdrawals to be made or for the plan to be cashed out unless you qualify for a hardship. Another disadvantage of withdrawing or cashing out your 401(k) before you qualify to do so is that you’re going to be faced with heavy penalties from doing so.
What if I leave my employer or change jobs?
If you leave your employer and you have a 401(k) built up, you will have two options: 1. Cash it out (and pay taxes) or you can roll it over to an IRA, which doesn’t impose any penalties as long as the money is transferred directly from the 401(k) to the IRA account. If you’re changing jobs, your new employer may have their own 401(k) plan and in that case, you can elect to transfer your current 401(k) to the plan at your new place of employment.
Now you’re left with questions regarding how much you should be putting into your 401(k) account if one is available to you and which investment options are appropriate. These are exactly the questions that The Financial Guys can help you with regarding your company’s 401(k) plan, plus we’re here to answer any other questions that you have.
Are there any tax advantages to a 401(k)?
Yes, there are tax advantages to having a 401(k). The biggest benefit is that your contributions are not taxed as income on a federal level. How your state handles your 401(k) contributions will depend on what state you live in. On top of the tax benefits, the income is also deducted from your pay pre-tax, which means that the overall income tax amount being deducted from your pay will be less.
Whether you’re just starting out with your 401(k) or you’ve been investing in one for a while now and you want a check-up to see if you’re making the most of it, contact The Financial Guys in Buffalo, New York to assist you with all of your 401(k) and retirement planning needs.
This material is not intended to replace the advice of a qualified tax or legal professional. Before making any financial commitment, consult with your tax adviser or attorney.