Navigating 401(k) plans doesn’t have to be complicated with a financial advisor. Retirement planning is a balancing act between saving enough and maintaining a comfortable lifestyle today. 401(k) plans are in growing popularity as employers shift away from pension plans.
Traditional 401(k) Plans
Employees with a 401(k) contribute a portion of their pre-tax paychecks to an investment account, reducing taxable income. There is a maximum contribution limit that increases at age 50, and employers may match your contributions. Your savings remain untaxed until withdrawal, when they’re taxed as regular income.
401(k) plans are defined contribution plans, meaning that while you may not know the exact benefit upon retirement today, you have more control over your portfolio. They are also employer-sponsored. If you leave your job before retiring, you may be able to withdraw, roll it into an IRA, move it to your new employer, or leave it as is. Withdrawing before the age of 59½ may be penalized, with narrow exceptions. Contact your financial advisor after leaving your place of employment to discuss the implications of each route.
Roth 401(k) Plans
Roth 401(k) plans are like the traditional 401(k) with different tax treatment. Instead of contributing from your gross income, you contribute from your net. Contributing after-tax dollars allows you to withdraw qualified distributions tax-free in retirement. Your expected tax bracket while in retirement may determine whether the Roth or traditional 401(k) is best for you. As usual, withdrawing before 59½ may be subject to penalties.
Required Minimum Distribution (RMD)
Unlike IRA plans, 401(k) plans require contributors to withdraw starting at a certain age, called required minimum distributions. As of May 2023, the RMD age is 73, with specifics on the IRS website. RMDs do not affect the tax impositions on 401(k) or Roth 401(k) plans.
Retiring Comfortably with a 401(k)
Finding the right retirement plan doesn’t have to be complicated. Adept financial advisors can discuss the intricacies of 401(k) plans, other retirement options, or build a customized retirement portfolio with you. For a free consultation with local Tulsa experts, contact us at (918) 492-1361.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.