If you’re employed, chances are you’ve heard of, or you already have, a 401k retirement account. Many employers offer them to their employees as a part of a benefits package along with perks like unlimited paid time off, health insurance, or even work-from-home benefits! Let’s look at a 401k, diving into this valuable benefit for current and former employees.
How does your 401k stack up against other retirement plans? How does your behavior stack up against other participants? Does age affect your 401k? Here are a couple of studies we’ve found that might help solve your craving.
One of the popular 401k administrators, Vanguard, published a massive study you can read online called America Saves 2021 report chalked full of fancy graphs and commentary. They have compiled all the stats and figures they’ve accumulated through all their investment and retirement accounts in one document to give investors one of the most thorough walk-throughs of how America saves for retirement.
According to the America Saves study:
- 84% of Americans participate in 401k plans, with the deferral rate averaging 7.2%
- The majority of employers automatically enroll their employees into a 401k plan upon hiring
- 31% of plan participants never contacted Vanguard regarding their plan account, an improvement over a decade ago
- A 401k account balance and participant’s age dramatically impact distribution behavior when parting ways from an employer.
This article from USNews.com advises on how much you should contribute to your 401k, including contribution limits and advice on increasing the rate at which you save over time. This study also gives information on how to max out your 401k and how to avoid penalties and fees.
401k Current Plan – Current Employer
If you have a current 401k plan, you can increase the percentage of your contribution every year. Some employers automatically increase the rate by 1% each year. Employers often offer a percentage match, with a popular match being the first 3% to 6%. You’ll want to investigate this percentage and set your contribution to at least that rate to take advantage of your employer’s contribution matching program. Failing to capture that match is like giving away those free dollars and placing more burden of retirement savings on your shoulders.
Whenever you get a raise, it’s also a good time to increase your contribution percentage. Utilizing the pay boost helps nudge up your annual plan contributions. Increasing your contributions in conjunction with a raise makes you less likely to notice your take-home paycheck changes. Highly compensated employees (HCE) who wish to maximize their annual plan contributions may limit their amounts due to IRS rules governing 401k plans for HCEs. If you find yourself in that position, check our post on IRAs to offset the impact of this restriction.
Do a little digging into your 401k plan offerings. Does it offer a post-tax ROTH contribution option? Similar to ROTH IRA contributions, many 401k plans now provide a post-tax contribution option.
A famous infomercial claims you can “Set it and forget it,” but don’t become a plan participant that does that! Over time revisit your plan contributions, holdings, and investment performance. Ensure it’s meeting your expected retirement needs, and implement change to hit your long-term goal. An excellent benefit of a 401k is that the account investments follow you, not your employer. However, you’ll want to be careful when leaving a job, as your employer’s 401k contributions do not immediately vest. If you leave your job before these contributions are vested, you’ll lose your employer’s portion.
If you’ve got a 401k from a previous employer, you can either leave it in that plan or roll the investment over into a new IRA account. No taxes are paid on a rollover, only when withdrawals occur. A critical step to maintaining that tax treatment requires account owners to roll funds directly from the 401k to an IRA account rather than taking a distribution.
Are you resisting rolling your 401k into an IRA, traditional or ROTH, because it’s a hassle? Consider consolidating your accounts to reduce the headache. You’ll have fewer accounts to track, reduce your paperwork load, and have fewer online passwords to remember. Plus, your consolidated account provides streamlined investment performance. You’ll now have more control over your annual management fees and broader investment opportunities offered in many employer-sponsored plans.
If your employer offers a 401k, take full advantage of this account to set yourself up for a fabulous retirement.
At Organized Instincts, our seasoned team of daily money managers can help you streamline your 401k accounts. We’ll support your retirement account strategy and assist your financial advisor in maximizing your investment goals. Schedule a free consultation today and give yourself the freedom to joyfully and abundantly live life.