A Refresher: What’s so great about work retirement plans?
For most people, a work retirement plan will be the primary investment vehicle used to save for what we all hope will be a long, exciting and fun-filled retirement. With the uncertain future of Social Security, and the rapid decline of pension plans, individuals are more responsible than ever to fund their own retirement. As we approach 401(k) Day, we at Smart401k thought it would be a good time for a refresher on the importance of participating in your company-sponsored retirement plan and the benefits you receive.
Automatic Savings
One of the biggest advantages to participating in a 401(k), 403(b), 457, Thrift Savings Plan or any other work retirement plan is automatic savings. Before you even have to think about it, the money is deducted from your paycheck and deposited into your account. This helps eliminate the urge to spend and takes away the work of having to make the contribution on your own.
Pre-Tax Deferrals
Traditionally, contributions into your 401(k) or other work retirement plan have been made on a pre-tax basis. This means you avoid paying tax today and instead pay it when you withdrawal from your account during retirement. Even the growth of your account is tax-deferred (no capital gains taxes), allowing it to grow more quickly than if it were taxed along the way. And by making pre-tax contributions, you are able to lower your taxable income and save for retirement at the same time.
After-tax (Roth) Deferrals
Still a new feature to 401(k) plans, many companies now allow you to contribute to your account on an after-tax basis. While you won’t receive an upfront deduction for your contributions, your account grows tax-free (no capital gains taxes), and you will not have to pay taxes when you make withdrawals in retirement. The Roth feature can be a great benefit for younger employees who are just beginning their careers and for those who expect to be in a higher tax bracket during retirement. For help deciding whether the Pre-tax or After-tax option is right for you, check out this article written by one of our advisers: Roth vs Traditional 401(k).
Company Match
Everyone likes free money, right? Well many employers are willing to match some of an employee’s contribution into their 401(k) or other work retirement account. Say, for instance, your employer will match you dollar-for-dollar on the first 3% you contribute; this means that as long as you put in 3% of your income, you earn an immediate 100% return on your investment. Make sure to check out your plan’s vesting rules. Even if you can’t afford to max out your 401(k), you should make sure to contribute at least as much as your employer is willing to match. Once you have deferred enough to receive the full employer match, you can gradually begin to increase your contributions. A rule of thumb is to save at least 10% of your annual income over your working career.
Contribution Limits
For 2010 the 401(k) contribution limit is $16,500, plus an additional $5,500 if you are over 50 – far higher than traditional IRA limits, and with no income caps. This amount is set each year by the IRS and gets adjusted for inflation. To be eligible for the additional $5,500 “catch-up” contribution, you simply need to be 50 years old by the end of the year – meaning if you’re 49 right now and turn 50 on December 31st, you can put away up to $22,000 ($16,500 + $5,500) this year.
While the proper allocation and choice of investments will be different for each individual situation, there are a few rules that hold true for everyone. The biggest decision you can make is simply to start participating in your plan. Time can be your best friend in saving to reach your retirement goals, so if you’re not already participating, sign up to start working toward achieving a retirement of choice, not chance.
At Smart401k, our goal is to take the guesswork out of the 401(k) plan and help set you on the path to financial freedom. Our experienced adviser team is here to help set up an allocation for your retirement plan based on your risk tolerance level and overall investment goals. Our goal is not only to provide you with a quarterly recommendation for your 401(k), but also to help educate you on your investment options and how to effectively manage your retirement savings. To learn more, or to become a member, visit our website at www.smart401k.com.
Joe McCulloch, Investment Adviser
About Smart401k
Smart401k is a Web-based investment adviser providing unbiased advice to help employees invest in their employer-sponsored retirement plans. Smart401k provides service to almost 11,000 clients who collectively have more than $1.5 billion in assets. Individuals receive personalized investment recommendations based on the funds in their plan and support of professional investment advisers available to answer all investment questions. Based in Overland Park, KS, Smart401k can be found at Smart401k.com.
