One of the most valuable employee benefits available is having access to a retirement plan that is linked with your company. The 54 percent of employees in the United States that have these plans are able to save for retirement in an account that grows tax-deferred until retirement. This alone is a huge advantage along with many others. Listed below are several tips that ensure that you get the most out of participation in a retirement plan at work.
Tip 1: Save as Much as You Can Today
Most financial advisors suggest that you save around 10-20 percent of your annual income each year throughout the course of your career in order to maintain the same lifestyle during retirement. This approach increases the likelihood that you will be able to earn enough savings to replace income goals during retirement.
Tip 2: Max the Match
If your employer offers a matching contribution to your 401(k) plan, then you should definitely invest the maximum amount that you can into your account so that you can receive the highest possible match. Taking advantage of this free money will definitely help you save towards retirement.
Tip 3: Think About Taxes
Pre-tax contributions to 401(k) plans provide an immediate tax benefit. This tax benefit depends on where you stand in the marginal tax bracket. In order to estimate the amount of tax savings you will see as a result of pre-tax contributions, you can use tools such as this Pre-Tax Savings calculator.
Employers may also give employees another option called a Roth 401(k) which is usually a smart option because it gives you the ability to invest on a tax-free basis. It is also a good choice if you believe that you do not need current tax benefits or think that you will be in a higher tax bracket when you begin taking distributions.
Tip 4: Avoid Early Withdrawals
It may be tempting to withdraw from your 401(k) account if you are in a tough financial situation, however try your best to avoid doing this. There is a 10% penalty tax and income taxes if you withdraw from your account before you reach either 55 or 59 ½ depending on the rules of your 401(k) plan and the age at which you retire. There are also long term consequences from making early withdrawals that can have a huge impact on your life during retirement. That is why it is highly recommended by financial advisors to only withdraw from your 401(k) account as a last resort.
Tip 5: Create a Written Plan
In order to get the most out of your 401(k) plan, it is important to have a vision and create goals on why you are saving for retirement to begin with. You should have a written plan of your vision and these goals along with your financials such as how much your need to reach these goals, how much you currently have saved up, and how much income you make per year. This written plan will help you keep track of where you currently stand, and how realistic it will be for you to meet you intended goals.
Importance of Maximizing Your 401(k)
A 401(k) is an amazing benefit that all employees should take advantage of. It is highly recommended that you maximize the amount that you originally invest into your 401(k). If you maximize the amount and do not touch your 401(k) until retirement, then you will have more funds saved up for retirement especially if your company matches your max. Having these extra funds will most often result in make your retired life a lot happier!
Toolkit to help you:
- BankRate 401K Calculator
- Blooom 401K Calculator
- NerdWallet 401K Calculator
- SmartAsset 401K Calculator
Videos to help you:
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