The Essential 401(k) Guide for Beginners

A 401(k) is a retirement savings plan offered by many employers that provides tax advantages to employees saving for retirement. It is a powerful tool that can help you build a substantial retirement nest egg over time. Here are some things to consider if you want to incorporate a 401(k) as part of your retirement plan:

401(k) Contributions

You can contribute a portion of your salary to your 401(k) on a regular basis, often through automatic payroll deductions. For 2024, the contribution limit is $22,500 for those under 50, with an additional $7,500 allowed as a catch-up contribution for those 50 and older.

Many employers offer a matching contribution up to a certain percentage of your salary. For example, if your employer matches 50% of your contributions up to 6% of your salary, contribute at least 6% to get the full match. It’s essentially free money for your retirement. Keep in mind, not taking advantage of that matching contribution is like turning down a part of your compensation package.

Tax Advantages

With a traditional 401(k), contributions are made with pre-tax dollars. This reduces your taxable income for the year. Taxes are paid upon withdrawal during retirement. With a Roth 401(k), contributions are made with after-tax dollars, meaning you pay taxes now, but qualified withdrawals during retirement are tax-free.

Withdrawing from Your 401(k)

Withdrawals from a Traditional 401(k) are taxed as ordinary income and are subject to a 10% early withdrawal penalty if taken before age 59½. There are some exceptions to this rule such as hardship withdrawals, first-time home purchases, or certain medical expenses.

Change in Employment

If you change jobs, you can roll over your 401(k) balance to a new employer’s plan or into an individual retirement account (IRA) without incurring taxes or penalties.

Increasing Your Contributions

Consider increasing your contributions, especially when you get raises or bonuses. Many 401(k) plans allow you to set up automatic increases.

Also, the money contributed to a 401(k) is typically invested in a range of options such as mutual funds, stocks, bonds, and other securities. You can usually choose how to allocate your contributions from these options.

Working with a Financial Professional

A financial professional can be an invaluable resource in optimizing your 401(k) and overall retirement savings strategy. With their expertise, they can help you choose the right investment options within your 401(k) plan, balancing growth potential with your risk tolerance and time horizon. They can also advise you on how much to contribute to maximize employer matches and take full advantage of tax benefits.

At Financial Dynamics, our advisory team can help you integrate your retirement plan with other savings and investment accounts, ensuring a cohesive and comprehensive approach to your financial future.

We can provide personalized strategies to help you reach your retirement goals, navigate market fluctuations, and adjust your plan as your life circumstances change. By working with one of our financial planners, you can gain peace of mind knowing you have a tailored roadmap to secure your financial future.

Advisory services offered through J.W. Cole Advisors, Inc. (“JWCA”). Financial Dynamics & Associates, Inc. and JWCA are unaffiliated entities.