With pension plans becoming increasingly rare (46% of companies offered them in 19801 but that fell to 11% by 20212), employer-sponsored 401(k) plans are now the go-to way to save for retirement. You simply put a percentage of your paycheck into an account to help you save for the kind of retirement you want—some employers will even give you what is essentially free money by matching your contributions. Enrolling in a 401(k) plan is a smart way to make your retirement plan even stronger, and the sooner you start, the more time your money will have to grow.
Typically, employers will offer two plan types. Here's the difference between them and how they can help you save for the retirement you've always dreamed of.
Use pre-tax dollars (meaning before taxes are taken out) to not only save for retirement, but also reduce your taxable income today. Once you start making withdraws in retirement, you'll be taxed at your income level then which may or may not be lower than today.
You can make contributions that will be taxed at your current income level, but once you start making withdrawals in retirement, they'll typically be tax-free. This option may be better for people who expect to be in a higher tax bracket in retirement.
You've got 401(k) questions, we've got answers.
Many employers offer a 401(k) plan as part of a benefits package and getting set up is easy. When you start a new job (or during open enrollment), you sign up and choose how you want your money to be invested. Your employer takes out whatever percentage or dollar amount you want from your paycheck and will put it into your account. Many employers will even put money into your plan on your behalf, either through matching or profit-sharing contributions. And no matter how much your money grows, it will grow tax free. Once you reach retirement age, you can start withdrawing your money to use however you want. Currently, there are no maximum income limits on who can contribute to a 401(k), however, there are limits on how much can be contributed. Want to learn more about how a 401(k) works? This article can help.
When you leave your job, you'll need to figure out what to do with the money that you've been contributing to your company's retirement plan. There are several options to consider. One could be to roll over your funds into an IRA or your new employer's 401(k) plan. In the case of a traditional 401(k), this will let you move your funds while maintaining the tax-deferred status. To help you determine which option is right for you and your retirement goals, talk to one of our financial advisors.
If you're like most people, a traditional 401(k) will be one of your main sources of income in retirement, so it's important to do what you can to help maximize contributions, and growth. Here are a few tips and considerations.
Try to max out your contributions: For 2022, you can invest up to $20,500. Not only will this increase your nest egg, but your contributions will also lower your current taxable income since they are taken from your paycheck before taxes.
Get your full employer match: If you're not able to swing the maximum contribution amount, put in at least enough to get the match offered by your employer—it's essentially free money after all.
Take advantage of catch-up: For those 50 years old and up, you can put in an additional $6,500 for a maximum annual contribution of $27,000 for 2022.
Your money is not taxed until it's withdrawn: You can start using the money in your 401(k) after age 59½. With a Roth 401(k), contributions are made with after-tax dollars so any amount you withdraw later will generally not be taxed.
Make future contribution increases automatic: Many employer-sponsored 401(k) plans offer an escalation option that gradually increases your contribution amount over time.
Carefully select how contributions are invested: Your 401(k) plan will most likely offer multiple investment options, so it's important to understand the fees, your risk tolerance, experience, other investment holdings, and retirement time horizon to maximize your plan.
How can a 401(k) plan fit into your retirement plan?
The best retirement plan will generate the right amount of retirement income needed to live the way you want. While an employer-sponsored 401(k) plan can help, it's not the only way. Depending on your goals, your plan could also include diverse sources such as IRAs, health savings accounts, the cash value of a life insurance3 policy, annuities, social security, savings, and investments. Our financial advisors will help make sure that you have the right tax-efficient income strategies and financial protection needed to retire the way you've always dreamed of.
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401(k) planning: a key to a smart financial plan
At Northwestern Mutual, we see your 401(k) as just one part of your overall financial plan. Through your financial advisor, you'll have access to other financial options, including investments for growth, insurance for protection, and annuities for more financial flexibility. Each is designed to reinforce the other so your personalized plan can work its hardest for you. Here's what our version of financial planning can do for you:
Help grow your money with investments for today and in retirement
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