Planning for retirement is a key point of financial wellness- but how can you make the most of your 401(k) plan without understanding all of the vocabulary? We’ve compiled a list of the most common terms used in employer-sponsored retirement plans to help you invest with confidence.
Types of Retirement Plans
401(k): A 401(k) plan is a company-sponsored retirement plan that eligible employees can contribute a portion of their salary into through a variety of investment options. In some instances, employers may also offer to make matching contributions. Many people find success in using both a 401(k) and a Roth IRA to fund their retirement.
IRAs: IRAs are a type of savings account designed to help you put money away for retirement in a tax-advantaged way. Two of the most common types are traditional and Roth IRAs. Though they are quite similar, the key differences lie in the tax restrictions and in the fact that traditional IRA’s require minimum distributions starting at age 72.
Types of 401(k) Contributions
By employees
401(k) contributions are typically ‘before tax’ money. The amount you choose to contribute is deducted from your paycheck before taxes are taken out. This means you are paying taxes on a smaller portion of your salary. There are limits each year on just how much you can put in your 401(k). In 2021, the maximum amount one can contribute was $19,500. If you are 50 or older, you can make a catch-up contribution of $6,500 in addition to the $19,500 for a total of $26,000.
Roth contributions: Many plans also offer options for employees to make post-tax ROTH 401(k) contributions from their paychecks. Post-tax ROTH contributions do not lower an employee’s taxable income, but they do grow tax free and aren’t taxed upon withdrawal.
Rollovers: After a job change, you have a few options for how to proceed with moving your retirement funds. This is a personal decision that depends on the employee offerings, read our blog to learn more about this transition!
By employers
Matching: Many employers offer matching contributions. For example, your employer may offer a 4 percent match. This means they will contribute the same amount that you do, up to 4 percent. Of course, you can personally contribute more, but the company will match only 4 percent. If you are not contributing to your company’s 401(k) plan and they have a match, you are leaving money on the table!
Profit sharing contributions: Your employer may choose to make a voluntary contribution to your 401(k) plan called a profit share. This contribution is not based on how much you contribute and is completely voluntary on the part of your employer, meaning it can vary one year to the next.
Investment Options
Most employer-sponsored plans give you a selection of mutual funds or other investments to choose from. Make your choices carefully. The right investment mix for your employer’s plan could be one of your keys to a comfortable retirement. That’s because over the long term, varying rates of return can make a big difference in the size of your balance.
If you have questions, it is always a great idea to call your financial advisor for guidance. But no matter what, please take advantage of any type of savings plan your current employer offers as the earlier and more aggressive you are, the closer you will come to achieving your financial goals.
Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.
Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.