Are you planning to invest in a 401(k) retirement savings plan, but unsure of the critical things to consider before making a decision? Look no further! In this article, we will share 20 essential things you need to know about a 401(k), including contribution limits, investment options, employer contributions, fees, and more. By the end of this piece, you will have the knowledge to make informed decisions about your 401(k) account and secure your financial future.
Since the inception of the 401(k) plans in 1978 by Congress, it has become the most widely adopted retirement account in the United States, with one-third of workers holding a 401(k)-style account in 2020, which is almost twice the number of those with an individual retirement account and thrice that of a pension. Although initially intended as a means of accumulating retirement wealth, 401(k)s are currently being utilized by retirees to manage their life savings.
It is crucial to note that every 401(k) plan has its unique characteristics and operates differently. Moreover, some plans present significant challenges that need careful consideration in retirement, particularly since 401(k) plans are owned and controlled by employers or former employers, where the employers make consequential decisions, even those you may not necessarily favor, despite it being your money.
A 401(k) is a type of retirement savings plan that has become increasingly popular in recent years. It is a defined contribution plan, which means that the employee, and often the employer as well, contribute money to the account, which is then invested for the employee’s future retirement. There are many important things to know about a 401(k), from its tax advantages to its investment options. Here are 20 things you need to know about a 401(k):
1. Tax-deferred: One of the most important advantages of a 401(k) is that contributions are tax-deferred. This means that you don’t have to pay taxes on the money you contribute until you withdraw it from the account.
2. Matching contributions: Many employers offer matching contributions to employees’ 401(k) accounts. This means that the employer will contribute a certain amount of money to the account, usually based on the amount the employee contributes.
3. Vesting: When an employer offers matching contributions, they may also have a vesting schedule. This means that the employee must work for the company for a certain period of time before they are entitled to the employer’s contributions.
4. Contribution limits: There are limits to how much an employee can contribute to a 401(k) account each year. The limit is set by the IRS and can change from year to year.
5. Catch-up contributions: If you are age 50 or older, you are allowed to make additional contributions to your 401(k) account, above and beyond the regular contribution limit.
6. Rollovers: If you change jobs or retire, you can roll over your 401(k) account to another qualified retirement account, such as an IRA.
7. Withdrawals: You can withdraw money from your 401(k) account before you retire, but there may be penalties and taxes involved.
8. Required minimum distributions: Once you reach age 72, you are required to take minimum distributions from your 401(k) account each year.
9. Investment options: 401(k) plans offer a variety of investment options, from stocks to bonds to mutual funds.
10. Asset allocation: It’s important to choose an asset allocation that matches your investment goals and risk tolerance.
11. Expense ratios: Each investment option in a 401(k) plan has an expense ratio, which is the amount of money that the fund charges for managing the investments.
12. Fees: In addition to expense ratios, 401(k) plans may also charge other fees, such as administrative fees or account maintenance fees.
13. Employer contributions: Employers can contribute to employees’ 401(k) accounts in a variety of ways, including matching contributions and profit-sharing contributions.
14. Profit-sharing contributions: Profit-sharing contributions are made by the employer and are based on the company’s profits for the year.
15. Safe harbor contributions: Safe harbor contributions are a type of employer contribution that allows companies to avoid certain testing requirements for their 401(k) plans.
16. Non-discrimination testing: 401(k) plans must pass certain non-discrimination tests to ensure that highly compensated employees are not benefiting more than other employees.
17. Fiduciary responsibility: Employers have a fiduciary responsibility to manage the 401(k) plan in the best interest of the participants.
18. Plan documents: The plan documents for a 401(k) plan outline the rules and regulations for the plan, including contribution limits, investment options, and other important details.
19. Plan sponsors: The plan sponsor is the employer or organization that sponsors the 401(k) plan.
20. Plan administrator: The plan administrator is the person or entity responsible for administering the 401(k) plan, including managing the investments and ensuring compliance with the plan documents and regulations
A 401(k) is a valuable retirement savings plan that offers many benefits, including tax-deferred contributions, employer matching contributions, investment options, and more. It’s important to understand the contribution limits, investment options, fees, and employer contributions, as well as your own goals and risk tolerance, when deciding how to manage your 401(k) account. With careful planning and management, a 401(k) can provide a secure retirement for you and your loved ones.