Taking the Pulse of Your 401(k)
The old saying "knowledge is power" applies to many situations in life, including retirement planning. The more you know about the benefits your employer-sponsored retirement plan has to offer, the more likely you'll be to make the most of them and come out ahead financially when it's time to retire. Take a minute to test your knowledge about your plan.
How much can I contribute?
The maximum contribution permitted by the IRS for 2017 is $18,000, although your plan limits may vary. Further, if you are age 50 or older, you may be able to make an additional $6,000 "catch-up" contribution as long as you first contribute the annual maximum. Check with your benefits representative to find out how much you can save. (Current data indicates that, on average, plan participants contribute 6.4% of pay annually to an employer-sponsored plan.1)
What investments are available to me?
Recent research found that 89% of retirement plan sponsors agreed that providing the right investments to help employees achieve retirement goals topped their list of priorities.2
In support of this goal, the study revealed that the average number of investment options offered among all plans was 22.3, up from 20.8 the prior year.2
Understanding your investment options is essential when building a portfolio that matches your risk tolerance and time horizon. Generally speaking, the shorter your time horizon, the more conservative you may want your investments to be, while a longer time horizon may enable you to take on slightly more risk.
What are the tax benefits?
Contributing to your employer's retirement plan offers two significant tax benefits. First, since your contributions are taken out of your paycheck before taxes are withheld, you get the up-front benefit of lowering your current taxable income. Plus, since you don't pay taxes on the money you contribute or on any investment earnings until you make withdrawals, more can go toward building your retirement nest egg.3
Will my employer make contributions to my account on my behalf?
Many companies try to encourage participation in their retirement plans by matching workers' contributions up to a certain percentage of pay. One recent benchmarking study indicates that 75% of employers who offer a plan also offer some type of matching contribution. The most common matching formula (reported by 28% of employers) was 51% to 99% of the first 6% of pay.1
How long before the money in the plan is mine?
Any money you contribute to your retirement account is yours, period. However, any matching contributions made by your employer may be on a "vesting schedule," where your percentage of ownership increases based on years of service. Current research indicates that immediate vesting of matching contributions continues to gain ground at 43% of employers, up from 32% the previous year.2 Because vesting schedules vary from plan to plan, be sure you know the specifics of yours.
Your benefits representative can help you answer these and other questions about your employer-sponsored plan. Being in the know may help you avoid missteps and make as much progress as possible on the road to retirement.
First Point Wealth Management is here to help you with all of your needs from Investment and Trust Services to Financial Planning, contact us today!
Information is provided by Ric S. Nelson, CFP©, Investment Representative at First Point Wealth Management. This communication is not intended to be financial advice and should not be treated as such. Each individual's situation is different. You should contact your financial professional to discuss your personal situation.
1PLANSPONSOR, "2015 PLANSPONSOR DC Survey: Plan Benchmarking," January 2016.
2Deloitte Development LLC, "Annual Defined Contribution Benchmarking Survey," 2015 Edition. (Based on 2015 plan data.)
3Withdrawals from tax-deferred retirement accounts will be taxed at then-current ordinary income tax rates. Withdrawals made prior to age 59½ may be subject to a 10% additional federal tax.