If you work for an employer, you might be eligible for a 401(k). If you are eligible and haven’t already signed up to contribute, run (not walk) to your human resources office and get your paperwork in, pronto.
A 401(k), which is a defined contribution plan sponsored by your employer that enables you to save money for retirement, could offer major benefits for your future self. Your employer might also offer a matching program which means free money that has the potential to grow exponentially in your retirement account.
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Overview: What are 401(k)s?
401(k)s are a tax-advantaged savings and investing plan that employees can use to save for retirement, allows you to contribute a fixed amount or percentage of your earnings and deduct that amount from your pre-tax income.
One of the benefits to contributing to a 401(k) is you don’t even have to think about it; it’s automatically deducted from your paycheck in the fixed amount or percentage you choose. In other words, you’re in total control of how much you contribute and what your investment choices are.
If funded early, the 401(k) is a perfect case study of the miracle of compound interest. The earlier you begin saving money in a 401(k), the better off you’ll be in your golden years.
Check out the chart for proof of why you’ll want to start earlier instead of later (although if you’re in your 40s and haven’t started saving, it’s never too late to start!)
Best 401k Advisors
Not sure what to do with you 401(k)? Get advice from one of these professionals.
SmartAsset’s SmartAdvisor Match tool is the online resource for consumers looking for a financial adviser. All you have to do is complete a survey regarding your age, income, investments and future goals. Once completed, you’ll be matched with up to 3 financial advisors based on geography, investable assets, and willingness to work with a remote advisor. In addition, SmartAsset reaches approximately 75 million people each month (as of September 2021) through its editorial content paired with its interactive calculator tools to help people navigate life’s big personal finance decisions.
- Consumers seeking actionable advice from a financial advisor
- Working adults ages 45 and older with household income more than $100,000
- Curious, savvy consumers looking for higher financial literacy
- People who want to feel more confident about their financial future
- The ability for an individual investor to be paired with a financial advisor based onbased on geography, investable assets, and willingness to work with a remote advisor
- A quick 10-minute questionnaire lets you be paired with up to 3 financial advisors
- No mobile app
- Little to no information on cryptocurrency, alternative investments or decentralized finance (DeFi)
Bitcoin IRA provides a solution for those looking to take their retirement account outside the traditional market. It partners with BitGo Trust to facilitate the setup of an individual retirement account (IRA) and a digital wallet to hold and trade cryptocurrency. Bitcoin IRA offers a proprietary always-on, self-directed trading platform that empowers you to invest in your future. In addition to digital currency, you can also use Bitcoin IRA to purchase gold, another popular alternative asset for savvy investors.
- New Bitcoin investors who have a handle on their overall financial strategy
- People who have room in their budget for a $100 monthly contribution for an easy set-and-forget savings and investment strategy
- Investors who can tolerate high levels of risk associated with trading crypto and who are able to hold precious metals investments for at least 10 years
- Great rollover options
- Investments stored offline for greater security
- Easily create an account and digital wallet in under 3 minutes
- 24/7 trading platform
- Due to U.S law, cannot transfer existing cryptocurrency holdings into a Bitcoin retirement account
- No financial advisory or planning services
iTrustCapital is a self-directed IRA provider that gives you the opportunity to invest in cryptocurrencies, gold and silver through your retirement account. iTrustCapital focuses on providing investors with a straightforward and easy-to-understand platform, which can be a major asset if you’ve never bought or sold alternative investments in the past.
When you reach retirement age, iTrustCapital allows you to choose whether you’d like to take your disbursements in cash or in the assets you’ve invested in. Though the platform does offer a limited range of cryptocurrencies when compared to brokers like Coinbase, its simple structure and unique IRA offerings make iTrustCapital a great place to invest.
- Investors who want to add gold, silver or cryptocurrencies to their IRA
- Those who are interested in taking a long-term approach to cryptocurrency or metal investing
- Beginner cryptocurrency investors
- Straightforward platform allows you to buy and sell assets in a few minutes
- Orders clear within 5 minutes
- 24/7 order placements and portfolio monitoring services
- Both live chat and phone customer service service available
- Limited number of cryptocurrencies to buy and sell
- No mobile app currently available
Main Components of 401(k)s
Other interesting facts and 401(k) components include:
- If you are age 50 or over, the catch-up contribution limit is $6,000 in 2019.
- You may begin accessing the money in your 401(k) beginning at age 59½.
- If you’re 70½ or older, you must start withdrawing the required minimum distributions (RMDs) from your 401(k) or face a penalty.
- if you are between the ages of 55 and 59½ when you leave your job, you can withdraw funds penalty-free as long as you leave money in that particular 401(k) plan.
|IRA||Roth IRA||SEP IRA||Simple IRA||401(k)|
|Best For||Individuals||Individuals||Self Employed||Small Corporation||Large Corporation|
|Matching||No||No||25%||3% minimum||$37,000 max|
|Account Holder||$30-$50||$30-$50||$30-$50||Terms Vary||Indirect|
|Employer||N/A||N/A||$30-$50||Terms Vary||Terms Vary|
You may have heard of another type of 401(k), the Roth 401(k), and there is one major difference between that and a traditional 401(k). Traditional 401(k)s are made using pre-tax dollars, which means that before the IRS takes its portion of your hard-earned paycheck, the amount you’ve specified for your 401(k) is also taken out of your paycheck.
Roth 401(k)s, on the other hand, are similar to Roth IRAs in that your money is contributed using post-tax dollars. If you believe you’ll be in a higher tax bracket when you retire, the Roth IRA could be the way to go, because once you begin taking distributions upon retirement, you’ll owe the government exactly $0 in taxes.
1. Tax Status
What does pre-tax really mean, anyway? “Pre-tax” is actually a big deal, because investing in a pre-tax account lessens the impact on your paycheck.
For example, if you elect to put $100 in your 401(k) each month, your take-home pay won’t actually go down $200; it’d be approximately $160 to $180 instead, depending on your salary/tax bracket.
Because your 401(k) pulls down your actual salary, you’re taxed on the lower income amount.
Since 401(k) earnings accrue on a tax-deferred basis, any dividends and capital gains earned will not be taxed once you begin withdrawing your money. Most individuals earn a smaller income after retirement, which (hopefully) means you’ll pay fewer taxes on 401(k) withdrawals.
2. Contribution Limits
You set the amount regularly deducted as a 401(k) contribution as long as you don’t go over the $19,000 annual limit for 2019.
At a minimum, it’s a good idea to contribute the amount your employer is willing to match because each dollar matched equals a 100% gain. Those employee contributions can then be itemized as deductions from adjusted gross income by your tax preparer.
Employers can also match employee contributions up to a set percentage of income or contribution amount. Employee and employer contributions combined are set at a legislated maximum of $56,000.
3. Employer Match
Some employers allow you to contribute immediately upon starting a new job and others require a waiting period, possibly six months or up to a year.
Also, some employers don’t allow you to become vested immediately; some companies require you to be with the company for five years or so before you become fully vested.
Often, employers also boost your contribution by adding their own match. Many employers kick in 50 cents for every dollar you contribute, up to a certain percentage of your salary. For example, if you contributed $2,000 during a given year, your company would put in $1,000.
Unfortunately, it’s not free to stick your money into a 401(k). However, the Labor Department requires your retirement plan administrator to report exactly how much your plan is costing you, so do your due diligence to pay attention to what kind of fees you’re being charged.
Morningstar is a great place to monitor retirement assets. Most often, your retirement package comes with a list of possible mutual funds where current and future contributions may be placed. Each of those funds has a five-character symbol, which can be used to track its progress.
You can establish a watchlist or portfolio on that provides ratings, performance, and specifications for every symbol entered. Here are a few great options:
|No-Load Mutual Fund||Symbol||Price||Rating||Turnover Ratio||Top 10 Assets||Number of Holdings|
|Vanguard Value Index||VIVAX||$39.81||4/5||9%||28.20%||349|
|Vanguard PRIMECAP Core Inv||VPCCX||$26.38||5/5||9%||29.65%||153|
|T. Rowe Price Mid-Cap Growth||RPMGX||$78.71||5/5||25.80%||18.34%||136|
|T. Rowe Price Blue Chip Growth||TRBCX||$99.23||5/5||34.50%||43.98%||125|
|Janus Henderson Triton D||JANIX||$28.10||5/5||21%||18.59%||127|
When you leave a job, it’s natural to want to take your old 401(k) with you to your new job. However, that’s not the only option.
There are actually four options you can consider:
- Cash out your 401(k)
- Leave your money in your old 401(k) plan
- Transfer your money over to your new job’s 401(k) plan
- Roll over your money into an IRA
Each has its merits, but you’ll want to watch the first one. You’ll be shouldered with a hefty tax bill (10%) if you decide to cash it out, not to mention, you’ll lose out the money you’ve saved for your golden years.
If you do decide to roll over your 401(k) because of a change in employment, your old 401(k) should be rolled over by requesting a full distribution and deposit into an IRA or a 401(k) within 60 days.
There could be some solid reasons you decide not to roll over your money and keep it in your old account: Your fees in your old plan could be lower or you could be happy with your old 401(k)’s performance and investment options. Ultimately, you’ll need to carefully consider which is more advantageous to you.
Pros and Cons of 401(k)s
As with most things, there are prons and cons to 401(k)s.
Pros for 401(k)s
- The offer of a substantial tax deduction
- Long-term tax-deferred growth
- Portability should employment change.
- Regular monthly contributions allow you to take advantage of dollar-cost averaging
Cons of a 401(k)s
These are mostly associated with administration.
- Smaller companies may depend more on in-house staff as the employees’ point of contact with their retirement plan, instead of an actual plan administrator
- An account holder can also create problems with investment choices and when rolling over a distribution to another firm, so choose with care
- Limited investment choices offered by your 401(k) provider
- High expenses due to fees built into your 401(k) plan
Final Thoughts on 401(k)s
If you have the opportunity, invest in your company’s 401(k) plan because of the ever-popular matching contribution.
Know where to go and which questions to ask, too. Most often, your point of contact with your company’s 401(k) starts with the financial statement issued by your company’s administrator. There, you’ll find contacts that may include your company’s human resources or benefits department, the administrator hired to establish the plan or your retirement funds custodian. Every administrator has a slightly different procedure for making changes to investments, contributions or distributions.
Another point of contact may be the custodian who acts as investment manager, holding the assets and issuing financial statements. Only by further investigation can you determine where, how and by whom changes are made.
Don’t have a 401(k) option through your employer? Read more about how to start investing for retirement.