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What's in Your Retirement Plan?

You have a retirement plan offered by your employer to help save for later years. However, there is much to learn about the 401(k) – details and explanations that will help you decide whether your plan is right for you.

Benefits

The biggest benefit of the 401(k) is the fact that it can be moved if you ever want to change jobs. Usually without incurring any penalties. You may:

  • Maintain the account as is (unless required to be removed by your employer).
  • Roll it over into another 401(k) account at your new employers, transfer it to an IRA.
  • Make a withdrawal at anytime time. This may result in penalties if withdrawn before you retire.  And you will pay income tax on the withdrawal.

Other benefits include:

  • Pre-tax contributions lower your taxable income rate
  • Your contributions and earnings are protected from income tax, giving it more time to grow before retirement.
  • Funds are often taxed at a lower rate when you withdraw them at retirement.

Penalties

You’ll want to leave money in the 401(k) rather than making withdrawals. This helps to lower your taxable income because of the pre-tax deduction to fund the 401(k). However, withdrawals are taxable based on your tax bracket. With penalties for early withdrawal.

Restrictions

There are restrictions to the 401(k) plan. Based on what your employer chooses as investment opportunities. They are also limited by the 401(k) fund manager. Despite the restrictions, however, the 401(k) can be a wise choice for retirement savings.

No Guarantees

A 401(k) is a defined contribution plan. This means that you are not guaranteed a certain income upon retirement. How much money you will receive when you retire is unknown. The same case for other defined contribution plans. How much money you contributed to the plan determines your nest egg at retirement. What your employer contributed, and the performance of the investments in your portfolio.

Vested Interest

The longer you remain at your job, the more vested interest you will have in your retirement plan. Your vesting is determined by the employer. Typically related to the number of years you have worked for them. How long you have been contributing to the 401(k). It takes 10 years of employment to become 100% vested.

Check with your human resources manager about vesting rules for your company.

Final Thoughts

The 401(k) plan you have may be difficult to understand, but it doesn’t have to be. Your financial adviser can give you good advice to help you get more of a return for your money, but you have to seek them out.

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