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