A 401k is a very popular retirement account that provides a variety of benefits to those that save and invest. Those that use their 401ks will be able to save for retirement with pre-tax dollars and could also take advantage of employer matches. When you are able to save using your 401k, you could end up accumulating a lot of money in your portfolio over time. If you do have access to a 401k, there are many things that you need to know and understand to ensure you are getting the most value out of it possible.
Investment Options
When you are looking to use your company’s 401k program, the most important thing that you need to understand is what your investment options are. In most situations, you will have a number of different funds and investment programs that you can choose from. You should carefully review each of these options to get a sense of what the investment goals are, what the investment track record is, and what the fee structure is. Based on this, you will have a better sense of which investment option you should choose.
Employer Matching
If you have a 401k through your employer, you may have access to an additional employer match. The amount of money that you will get through the match varies from one employer to the next. If it often at least a couple additional percentage of income that will be added to your 401k account each year. At a minimum, you should try to save enough money in the account to take advantage of this match.
Vesting
If you do have a 401k match through work, you still may not qualify for it the day you receive it. Most companies will give you the money with each paycheck. However, you are often required to work for the company for a period of time before it vests and you are allowed to keep it. If you happen to quit your job you could end up losing all or a part of the employer match that you have received. However, you will get to keep all of which you saved.
Annual Limitations
When you are preparing for retirement, you may want to try and save as much money as you possibly can. However, due to the tax benefits that one of these accounts provides, you may be limited to how much you can invest and save. For those that are under 50 years old, the maximum amount that can be saved each year is about $18,500. Those that are over 50 years of age can save another $5,000 each year. You may also be able to take advantage of other retirement account benefits including Roth 401ks, if they are available through your employer, or even IRAs if you want to be able to maximize your retirement savings.
Withdrawals
While you will spend decades saving money in a 401k, there will come a time when you want to start taking money out of it. In general, you will not be able to start taking money out until you are at least 59.5 years old. However, if you are still working, you may want to avoid taking withdrawals until you are retired. Since the money that you will be taking out will be taxed and normalized income, you should also careful consider the tax implications of every withdrawal that you make. Also, you need to remember that you will be required to start taking withdrawals from your account when you are in your early 70s.
Other Withdrawal Options
While a 401k is designed to be used to save and prepare for retirement, you can still take money out of it at other times in your life. If you are dealing with a financial emergency, taking money out of your 401k may be the best option. Depending on the situation, you may be able to qualify for a hardship withdrawal. If you do not qualify for a hardship withdrawal, you will not only be taxed on the money taken out but you will also be hit with a 10% fee. Another option, which your employer may provide, is a 401k loan in which you borrow money from your account.
