According to the Investment Company Institute, approximately 52 million Americans actively contributed to a 401(k) plan in 2012. Obviously these retirement plans are one of the most common ways that people plan for their financial futures. Whether you have one or not, it’s important that you understand these plans and the options available to you. Let’s run through a few of the questions that we hear most often about 401(k)s.
What is a 401(k)?
A 401(k) is a retirement plan that employers can offer to their employees. These plans typically offer two main advantages. First, they allow investors to defer taxes on the money they invest until they actually withdraw the money. Second, many companies that offer 401(k)s will match their employees’ contributions up to a certain percent. (These features may vary based on the company that offers the plan.)
Bonus Fact: The name 401(k) comes from its section in the Internal Revenue Code.
What are the types of 401(k)s and how are they different?
There are three main types of 401(k)s: traditional, safe harbor, and SIMPLE. For more information, visit this page from the IRS.
If I don’t have a 401(k), how can I start one?
The best way to start contributing to a 401(k) is talking to the human resources manager at your place of employment. They can let you know which plans are available to you and if your employer will match contributions.
How much can I contribute to my 401(k)?
The maximum amount you can defer to a traditional or safe harbor 401(k) in 2015 is $18,000. The maximum amount for SIMPLE 401(k)s is $12,500 this year. In some cases, those over 50 can make catch-up contributions to their plans. The limit for these contributions in 2015 is $6,000 for traditional and safe harbor 401(k) plans and $3,000 for SIMPLE plans.
What happens to the money I contribute?
Money that is deferred to a 401(k) can be invested into stocks, bonds, or mutual funds. Depending on the specific plan, either the employer, employee, or a third party can determine how the funds are invested. This also varies based on the financial institution a company partners with to offer these plans. If you currently have a 401(k), it’s your responsibility to know how this money is invested.
Why can’t I invest the money myself?
You can. But you should be aware of your 401(k) options, especially if your employer offers to match your contributions. This essentially equates to free money added to your retirement savings.
Is a 401(k) enough to take care of my retirement needs?
This certainly depends on how much money you think you will need during your retirement years. Most likely, you will want to employ a few different saving and investing strategies in your retirement plan. For help in creating your retirement plan, contact us at Safeguard Investment Advisory Group. We’ll analyze your 401(k) and your other current efforts and determine what can be done to strengthen your plan.