You may have just set up a 401k and wonder what to do next. Or you may have set up a 401k 10 years ago and may not know what you should do now.
In this article we’ll explore more about how to tackle your 401k.
What is a 401k?
A 401k is an employer-sponsored retirement plan. As an employee, you can choose to contribute a portion of your wages to fund a 401k account and your employer may match a portion of your contributions.
>>Read More: What is a 401k?
You can choose to invest the funds saved in your 401k in your employer’s plan offerings and take distributions from the account to support you when you retire.
How Does a 401k Work?
As an employee, you can decide how much to contribute to your account — subject to limitations, of course.
- In 2021, employees can contribute up to $19,500 to their 401k plan for 2020 and 2021.
- Employees 50 or over can add an additional catch-up contribution of $6,500 in 2021.
- Employer and employee contribution limits total $58,000 ($64,500 with the catch-up provision).
You can choose from two kinds of 401k accounts: You fund traditional 401ks through pretax income and Roth 401ks through post-tax income.
>>Read More: Roth 401k vs. Roth IRA – The Key Differences
Contributions get taken out of your paycheck before income taxes get calculated. These go into mutual funds and other investments and grow in value over time. You pay ordinary income tax on the withdrawals on a traditional 401k in retirement.
Best Strategies to Manage Your 401k
Consider the following tips to manage your 401k.
- Make sure you get the employer match. Many employers match $0.50 for each dollar you save up to a certain amount. Make sure you save enough to take advantage of it. If you don’t save enough to get the match, you leave free money on the table. You can link your current and old 401k accounts to Personal Capital’s Dashboard to see them as part of your overall, holistic net worth.
>>Read More: How Does 401k Matching Work?
- You can defer income tax payment when you save for retirement. Money goes into your retirement account before taxes in traditional 401k plans.
- You can tap into the saver’s tax credit if you earn a low income (less than $33,000 for individuals, $49,500 for heads of household and $66,000 for couples).
>>Read More: Retirement Savings: The Saver’s Credit Explained
- Consider a Roth 401k, a tax-free growth option. If you expect to be in a higher tax bracket later on, a Roth 401k might offer a great option. You pay no income taxes on qualified distributions.
- Check your fees. Some 401k investments have very high costs. Find the lowest-cost option that matches your risk tolerance. Personal Capital’s free and secure financial Dashboard provides you with tools to analyze your investments and uncover hidden fees.
Retirement Goal Ideas
Know what you should have in your retirement account at every life stage. Your nest egg should multiply by these amounts at specific ages, according to many experts:
- By age 30: The equivalent of your annual salary saved (For example, if you earn $50,000 per year, you should have $55,000 saved.)
- By age 40: Three times your income
- By age 50: Six times your income
- By age 60: Eight times your income
- By age 67: Ten times your income
>>Read More: The Average 401k Balance By Age
Recommendations for Personal Finance
To make the most of personal finance in your life, you can practice good habits a few different ways.
Know the lingo! Understand the definition of a stock, bond, and mutual fund. You want to get to know as much as you can about investing. Self-education can go a long way to helping you plan your goals and understanding how your 401k fits into those goals.
Learn about your own finances using Personal Capital’s free financial tools. You can link your retirement accounts to the Dashboard and use Personal Capital’s free Retirement Planner tool to get real-time feedback on how prepared you are to meet your retirement goals.
Know Your Risk Tolerance
Do you understand risk tolerance and how much risk you can tolerate? Many 401k plans allow you to choose investments solely based on your risk tolerance.
>>Read More: How to Build the Best Retirement Portfolio
Organize Your Financial Goals
What have you always envisioned as your long-term investment goals? Do you want to retire well? Buy an investment property? Travel? How you save your money affects what you do in the future. Organize your financial goals, prioritize them and even put them in order of what you want to achieve.
Organize them into long-term goals, which can include:
- Buying a home and paying off your mortgage
- Setting a target retirement date
>>Read More: Your Guide to Retirement Planning
Then, set short-term goals:
- Setting a budget
- Using cash for purchases
- Saving for a vacation
Get Clear on What to Do Next
Finally, be honest with yourself about how much time you want to devote to learning about your finances and organizing your financial goals.
If you know you won’t spend enough time on your own 401k management, get to know a financial advisor who can help you with your 401k. You want to make sure you’re on track to meet your goals, and one of the best ways to do that is to have someone with experience show you the way.
The best approach to your 401k is an active approach so you can retire comfortably and financially confident.
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