Fisher Investments Answers Your Most Common 401k Questions

Transcript

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401k plans are one of the most common ways that  people in the United States save for retirement.  
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So, it's not surprising that when people have  questions about investing in retirement, they often  
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ask about 401(k)s. In this video, we'll cover some  of the basics about 401(k) plans, we'll also talk  
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about contributing to and withdrawing from 401(k)'s,  but for now, let's start at the top. What is a 401(k)?  
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A 401(k) is a type of retirement savings plan many  employers in the United States set up for their  
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employees. The name comes from the section of  the IRS tax code that created the provision  
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for this kind of retirement plan. Here's  how they work: During your earning years,  
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you take a portion of your paychecks and  transfer it to your 401k account. The idea  
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is that you'll invest that money so it can grow  over your entire working life, then you withdraw  
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that money to help pay for things when you retire.  Many plans give employees the opportunity to  
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invest their 401(k) savings in various investments  like stocks mutual funds or exchange traded funds.  
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There are two basic types of 401(k) plans, the traditional 401(k) and the Roth 401(k). They differ  
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slightly in how they relate to taxes. For both  types, contributions come from your paycheck.  
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In a traditional 401(k), you contribute to the plan  before the IRS takes taxes out of your paycheck,  
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then when you withdraw the money at retirement  the IRS taxes the withdrawals as ordinary income.  
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With the Roth 401(k), you contribute after the  IRS has taken taxes out of your paycheck then  
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when you retire, you can  withdraw the money tax-free.  
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So, what are the benefits of contributing  to your employer's 401(k) plan?  
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To start, they help you save for retirement with  some tax advantages. You see, while that money  
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is in there growing, it's doing so without taxes  eating away at it. That means you're not getting  
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hit with taxes on capital gains or interest  and dividend income while the money's invested.  
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There's another potential tax benefit if  you're contributing to a traditional 401(k).  
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Because you're contributing before taxes, you're  actually lowering your reported income to the IRS  
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and potentially reducing your tax bill. With  a Roth 401(k), the potential tax benefit comes  
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when you withdraw at retirement. Some employers  match employee contributions in their 401(k) plans  
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up to a certain percentage. That's a tremendous  benefit because it essentially means free money  
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to help you build your retirement nest egg. The  other decision you need to make with a 401k is how  
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to invest your funds. Your employer's 401(k) provider  will probably have a set of options to choose from,  
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typically mutual funds or exchange traded funds  called ETFs. Some 401(k) providers also allow you  
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to invest in individual stocks and bonds. If your  employer offers a 401(k) plan, you might be wondering  
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where to go for more info? Two places, the first  is your employer's human resources department.  
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The HR team should be able to provide you with  more details about the retirement savings plans  
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your company offers. You can also get  details from the 401k plans provider,  
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usually an external vendor. This is the company  that administers the plan for your employer.  
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They'll be able to tell you account balances and  help you adjust your investments. They may even  
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provide educational materials to help you become a  more confident retirement investor. Next, we'll talk  
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a bit more about contributing to a 401(k). Probably  the most important question, how much to contribute ? 
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It's good to save as much as possible within your  means. If possible, you should try to max out your  
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contributions. The maximum you can contribute  is set by the IRS. Currently, the maximum yearly  
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contribution to a 401(k) is $19,500. If you're over  the age of 50 the IRS allows what they call  
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"catch-up contributions" that's an extra $6,500 per year you can put into  
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your 401(k), but don't let those numbers intimidate  you. When it comes to saving for retirement, every  
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little bit helps. Let's say you're able to put  away just $100 a month. Over time the power of  
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compounding helps your savings grow. Assuming an  8 percent annual rate of return, after 10 years that $100  
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a month would be worth over 18,000. In twenty  years, you're looking at over $57,000 
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and after thirty years, $100 a month  becomes over $141,000. 
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Thanks to compounding, even saving relatively  small amounts of money can add up big over time.  
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Need another reason to contribute, how about  free money? Some employers offer incentives  
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to encourage their employees to participate.  They'll match some or all of the money you put in  
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and if your employer contributes that's on top of  your $19,500 limit.  
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One last tip, since there are restrictions  on when and how you can withdraw from your  
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401(k), you might consider having other savings in  case you have unexpected costs before retirement.  
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Speaking of withdrawals, let's take a look at some  common questions about taking money out of a 401(k).  
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If your employer offers a 401(k) plan and you've  been contributing, it's natural to think about  
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how you'll eventually be able to withdraw that  money. There are three basic ways to withdraw  
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money from your 401(k). Regular withdrawals are  the withdrawals you take when you're at or  
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near retirement age. You can start taking regular  withdrawals when you're 59 and a half years old.  
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You should also be aware of required minimum  distributions or RMDs. When you reach age 72,  
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the IRS requires you to withdraw a certain amount  each year, that's the RMD and the amount varies  
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from person to person based on the amount you  have in your retirement accounts and your age.  
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You can visit the IRS website for more info  about RMDs and how to calculate how much you  
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might need to withdraw. One of the main reasons  people think about withdrawing money from their  
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401(k) before they reach age 59 and a half, is some  kind of financial emergency–what the IRS calls an  
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immediate and heavy financial need. Some employers  allow for these types of hardship distributions  
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but the IRS has specific rules regarding  what the withdrawal can be used for  
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and keep in mind that a hardship withdrawal  will result in taxes and a penalty for most  
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people. With a traditional 401k, if you withdraw  before age 59 and a half, you may have to pay a 10 percent  
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penalty on the amount you take out, plus  the regular income tax you'll have to pay.  
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A couple other situations to mention  that may spur an early withdrawal,  
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if you pass away your heirs can access the funds,  also you can withdraw the funds in the unlikely  
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event that your employer terminates the plan  without another plan to succeed it. Some employers  
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may offer loans to 401(k) participants. Here you're  borrowing from 401(k) funds that you've contributed  
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and the employer contributed money that is  vested or 100 percent yours. With a 401(k) loan, since you're  
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borrowing money from yourself, you're required to  pay interest. Keep in mind, there are restrictions  
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in most cases the maximum amount you can borrow  is either $50,000 or 50 percent of your vested balance  
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whichever is less and you'll generally have to  repay the full amount within five years by making  
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at least quarterly payments. The most important  thing to keep in mind is that even though you're  
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paying yourself interest, taking a 401(k) loan could negatively affect your long-term retirement  
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savings. You can find out more details about your  401(k) plan's withdrawal options by contacting your  
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employer's HR department or the plan's provider. If  you enjoyed this video, you can click the subscribe  
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