When You Retire What To Do With 401k – 4 Steps to Retirement with a 401(k) (Infographic) by Jenny Carter • Posted on February 6, 2018
Planning for retirement can be complicated. But saving for retirement is an important part of your overall financial well-being. So how do you create the best retirement savings plan for where you currently live and your retirement goals? With your 401(k) and some realistic budgeting!
- 1 When You Retire What To Do With 401k
- 2 The Best Order Of Operations For Saving For Retirement
When You Retire What To Do With 401k
As a quick reminder, a 401(k) is an employer-sponsored retirement savings plan that allows employees to save and invest a portion of their paychecks. Often, the employer will match the employee’s contribution percentage and total vests over time. Learn more about the basics of your 401(k) here. Once you understand everything your 401(k) can do for you, it’s time to start building your retirement savings plan.
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While the thought of planning for retirement so early may seem daunting now, the long-term benefits and overall improvements to your financial well-being will pay off in the long run. Whatever your current age, saving for retirement should be part of your budget. Here’s a four-step plan to help you create a budget that will enable you to reach your retirement savings goals.
The first step is to look carefully at your current spending habits. Reviewing your transactions each month will reveal that you are spending too much on morning coffee or a weekend movie with the kids. By identifying areas that affect your savings potential, it’s easier to understand how you can redirect your spending and start building your retirement savings.
We all know how important a budget is when it comes to saving, but creating an educated budget is key. Once you’ve examined your spending habits, debts and other payments, you can create a realistic budget based on your needs. Having ongoing 401(k) contributions in this budget is essential so you can stay on track toward your retirement goals.
Optimizing your retirement savings is an important part of your budget savings plan. Saving money in a 401(k) is the best way to increase your savings, which will help you build a comfortable retirement. In addition to your 401(k) contributions, be sure to set up other savings accounts for emergencies or other special events. Dipping into your 401(k) before retirement can hurt your overall savings, so building backup savings accounts is critical.
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Your educated budget is a great current snapshot of your financial situation, but what are your long-term financial goals? What kind of lifestyle do you want to live after retirement? These are the questions you should ask yourself when setting your long-term savings goals. And remember, make sure these goals are realistic with your current living situation and expenses.
Your ability to prepare for retirement depends as much on your long-term preparation as it does on your short-term preparation. Follow our first four steps now to make sure you’re using your 401(k) plan so you can live your best life in your golden years.
Jenny Carter is SVP, Managing Director, Institutional and Client Services in Bankers Trust’s Wealth Management division, where she oversees the administration of qualified and non-qualified retirement plans. Jenny is a Certified Employee Benefits Specialist (CEBS) and holds a Retirement Plan Associate (RPA) qualification as a Fellow of the Life Management Institute (FLMI).
Subscribe to the Hub to get the latest news from the Hub on topics that matter to you. A 401(k) plan is a tax-advantaged retirement savings plan offered by most American employers. It is named after a section of the United States Internal Revenue Code (IRC).
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An employee enrolled in a 401(k) agrees to have a percentage of each paycheck deposited directly into an investment account. The employer can contribute some or all of this contribution. An employee can choose between several investment options, usually mutual funds.
The 401(k) plan is designed to encourage Americans to save for retirement. Tax savings are among the benefits they offer. There are two main options, traditional and Roth, each with different tax benefits.
With a traditional 401(k), employee contributions are deducted from gross income. This means the money comes out of your paycheck before income taxes are deducted.
As a result, your taxable income is reduced by the amount of your annual contributions and can be claimed as a tax deduction for that tax year. The money you give or the investment income is usually not taxed until you withdraw the money during your retirement.
The Best Order Of Operations For Saving For Retirement
With a Roth 401(k), contributions are deducted from your after-tax income. This means that contributions come from your salary after income taxes have been deducted. Therefore, tax exemption does not apply for the contribution year. However, except for withdrawals during retirement, you will not pay any additional taxes on your investments or investment income.
Although contributions to a Roth 401(k) are made with after-tax money, there are generally tax consequences if money is withdrawn before age 59½. Always consult a qualified accountant or financial advisor before withdrawing money from a Roth or traditional 401(k).
However, not all employers offer a Roth account option. If a Roth is offered, you can choose between a traditional and a Roth 401(k). Or you can invest in both up to the annual contribution limit.
Both traditional and Roth 401(k) plans are defined contribution plans. The employee or employer can make contributions to the account, subject to dollar limits set by the Internal Revenue Service (IRS). Employee contributions to a traditional 401(k) plan are made with pre-tax dollars and reduce their taxable income and adjusted gross income (AGI). Contributions to a Roth 401(k) are made with after-tax dollars and do not affect future taxable income.
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A defined contribution scheme is an alternative to a traditional pension known as a defined benefit scheme. With an annuity, the employer undertakes to give the employee a fixed sum for life at the time of retirement. In recent decades, 401(k) plans have become more common, and traditional pensions have become increasingly rare as employers transfer the responsibility and risk of pension savings to their employees.
Employees are also responsible for choosing specific investments in their 401(k) accounts from a selection offered by their employer. These offerings typically include a variety of stock and bond mutual funds and target funds designed to reduce the risk of investment losses as a worker approaches retirement.
Employee account holdings can include guaranteed investment contracts (GICs) issued by insurance companies and sometimes even the employer’s own shares.
The maximum amount that an employee or employer can contribute to a 401(k) plan is adjusted from time to time to account for inflation, which is a measure of price increases in the economy.
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For 2024, the annual employee 401(k) contribution limit for employees under the age of 50 is $23,000. However, those 50 and older can earn $7,500.
In 2023, employee contributions are limited to $22,500 per year for employees under the age of 50. If you are aged 50 or over, you can make an additional contribution of $7,500.
If your employer also contributes, or if you choose to make additional after-tax contributions, which cannot be deducted from your traditional 401(k) account, the sum of the employee and employer contributions for the year is:
For example, an employer can match $0.50 for every $1 an employee contributes, up to a certain percentage of salary.
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Financial advisors often recommend that employees contribute at least enough money to their 401(k) plans to fully match their employer.
If their employer offers two types of 401(k) plans, an employee can split their contributions, putting some money into a traditional 401(k) and some into a Roth 401(k).
However, their total contributions to both account types cannot exceed the same account limit (for example, $23,000 for those under 50 in 2024 or $22,500 in 2023).
Employer contributions can be made to a traditional 401(k) account and a Roth 401(k). Withdrawals from the former are taxable, while matching withdrawals from the latter are tax-free.
What 401(k) Employer Match Is And How It Works In 2023
Your contributions to your 401(k) account are invested according to options provided by your employer. As mentioned above, these options usually include a mix of stock and bond mutual funds and target date funds designed to reduce the risk of investment losses as you approach retirement.
How much you contribute each year, whether your company matches your contributions, your investments and their earnings, and how many years you have until retirement all affect how quickly and how much your money grows.
If you don’t withdraw money from your account, you won’t have to pay taxes on investment earnings, interest or dividends until you withdraw money from the account after retirement (unless
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