Why Having Just a 401(k) Isn’t Enough
You are an adult! You have a grown-up job! You went to a 30-minute meeting about retirement plans and signed up to put a percentage of your salary into something called a 401(k)! Your company matches it! You go, Glen Coco!
There are MANY advantages to signing up for your company’s 401(k) plan, but here are a few things to look out for.
Contribution Limits
This year and next year (2020 and 2021), the IRS only allows you to contribute up to $19,500 to your 401(k) plan (if you are under 50 years old). Planning for retirement solely using annual 401(k) contributions may not be enough for your future retirement needs. Consider putting your extra investable assets toward another goal!
Taking Withdrawals too Early
Although you are technically allowed to take money out of your 401(k) for any reason, you have to be aware of two main drawbacks to withdrawals. If you are under 59 ½ and withdraw from the 401(k), you will generally be slapped with a 10% penalty at tax time. In addition, any withdrawals are usually subject to an automatic withholding of 20% by the IRS for taxes. Combined, you are looking at actually pocketing only 70% of the amount you wanted to take out. In my personal opinion, the biggest drawback to withdrawing from these types of accounts pre-retirement is simply that you are depleting the funds you’re trying to build for the golden years.
Contributing More Than Your Match
If you were paying attention in the 401(k) meeting at your job or if you’re wondering why there’s some extra money showing up with your own contribution into your retirement plan, you may know that companies usually provide a partial match to your 401(k) contributions. Sometimes, an employer will add 50% of what you contribute, up to 6% of your pay. Other employers will match dollar for dollar up to 3% of your total salary. Keep in mind that employer matching varies across companies. It’s up to you to make the most of your employer matching while keeping the contribution limit in mind (discussed above). One of the ways you can keep an eye on all of your financial goals is to contribute what can be matched to your 401(k) and use the rest of your investable earnings toward a different goal.
I’m happy to take a look at your 401(k) and strategize with you. Give me a call!