Getting The Most Out Of Your 401(K)

No matter your age, it’s always a good time to start, or continue, educating yourself about your retirement plan and how you can make the most of what’s offered to you.

Many individuals have heard of 401(k)s, but they may not be entirely aware of how they work, or how they can benefit from them.

A 401(k) is an investment retirement plan offered by most corporations to their employees. You specify the percentage of your paycheck you’d like to save and your company deposits that money into your account through a payroll deduction. Although they are sponsoring the plan, your company doesn’t actually invest the money, but instead hires a company to handle employee investments.

Company Matching Contribution

Every year maximum limits are determined by the IRS on how much an individual can contribute to their 401(k) depending on inflation. Currently, individuals under the age of 50 can contribute a max of $18,000. Many financial advisors encourage investing the maximum amount, if you have the means, in order to reap the benefits of valuable tax breaks.

If the maximum amount is out of reach for you, many employers offer a matching contribution that you must qualify for by contributing a specified percentage into your 401(k) plan. You should strive to contribute enough to meet the requirements of your company’s matching contribution so as not to miss out on virtually free money.

What am I investing in?

401(k)s are simple, in that all you must do is specify how much you want to invest, and then your company does it on your behalf. However, where you choose to invest your money is a decision you must make.

There are a number of investment or mutual fund options you can choose. Figuring out the investments that are best for you is something you should take time researching and receiving financial advice on. Stocks generally have the best return in long-term investments, such as retirement, because they typically produce yields that outpace inflation. There’s also the possibility of considerable gains with a diverse portfolio of investments.

How and when do I receive my funds?

At the golden age of 59½ individuals can begin withdrawing money from their 401(k)s without penalty. Withdraw at any age before that and you could get hit with an early withdrawal penalty tax. There are some exceptions to the rule, but for the most part, withdrawing early isn’t a great idea; In addition to the 10% penalty, you will lose out on the tax-deferred growth advantage and have to pay income tax on the full amount distributed.

If you don’t need, or want, to take money out at 59½, you can legally hold off on distributions of funds until age 70½. Then, you are required by law to make minimum withdrawals from your plan. Once of age, you are able to receive funds through the following distribution options: Cash out, rollover, income annuity and installments.

For more money saving tips, check out our post on Building your Emergency Fund