Retirement Plan Basics
We want to help you maximize your retirement plan wherever you are on your savings journey.
How does a 401(k) or 403(b) work?
A 401(k) plan- or 403(b) plan- is an employer-sponsored retirement savings plan that offers significant tax benefits while helping you save for the future. You contribute to the plan through payroll deduction, which can make it easier for you to save for retirement.
When you start a new job, one of the first things you'll be asked to do is enroll in your employer's plan. Enrolling and reviewing your retirement plan can be a little daunting, especially if you're unfamiliar with how these plans work. Each plan has different rules and regulations, so be sure to ask your HR department or refer to your plan documents for more plan-specific information.
Whether you are just getting started or if you just need a refresher, we've narrowed down the three most important factors to consider when enrolling or reviewing your retirement plan.
1. CONTRIBUTIONS
Pre-Tax or Roth?
The first thing to consider is how you want to contribute to your 401(k) and how much per paycheck. You can choose to have your contributions come out of your paycheck pre-tax, meaning they'll be deducted from your pay before taxes are taken out, and taxes are deferred until retirement.
Or, you can choose to make Roth contributions, which means you'll pay taxes up front on the money you contribute. This can be a good option if you think you will be in a higher tax bracket when you withdraw the money. Just be aware of the Roth 5-year rule. You can also choose a mix of both pre-tax and after-tax contributions. Still need help deciding? Our team can help you determine what's right for you.
How much should I contribute to my 401(k)?
The amount you contribute depends on your situation. The IRS sets a limit of $23,000 for 2024 contributions ($30,500 if you're age 50 or older), which does not include employer contributions. Your specific plan may have other limitations, and you can find out more in your plan documents. This limit is separate from the $7,000 IRA annual limit ($7,000 ($7,500 if you're age 50 or older).
We recommend you contribute as much as possible because Social Security will likely not be enough to cover your living expenses in retirement. Ideally, you will put in 10-15% of your paycheck. Otherwise, contribute at least enough to receive the full employer match, and challenge yourself to increase your contribution a little each year or every time you get a raise at work!
IRS. (2024, November). Retirement Topics - 403(b) Contribution Limits. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-403b-contribution-limits
2. INVESTMENTS
How should I invest in my retirement plan?
Typically, you will have a menu of investments to choose from varying in risk, return potential, and cost. To determine your asset allocation, in other words, the mix of the menu, the most significant factors you need to consider are time horizon, risk tolerance, and the cost of the investments.
- Do it for me: Consider a target-date fund. Target-date funds are professionally managed mutual funds that adjust a given asset allocation based on a given date in the future (like your target retirement date), slowly becoming more and more conservative as you reach that date. This is an excellent option for those investors that want to be hands-off because these funds are already diversified and rebalance automatically. TDFs tend to be low-cost as well.
- Do it myself: If you want to build your own portfolio, first make sure you understand the basics of the investments in your plan and investing principles. We would recommend speaking to a financial professional if you take this route.
Remember, all investing involves risk, and we will experience periods of market volatility from time to time, but it doesn't have to be scary. In fact, to outpace inflation, you will need to invest so your money does not lose its purchasing power and to take advantage of compounding interest. It's all about managing your risk in line with your goals as best you can.
While we don’t recommend you check your balance daily, checking in periodically is a good idea to ensure you are on track. Have questions about investments? Give us a call, and one of our financial advocates can help.
3. BENEFICIARIES
How can I protect my assets?
One of the most important (and often overlooked) steps when enrolling in your retirement plan is to designate a beneficiary. This person (or persons) will receive your account balance in the event of your death. You can usually change your beneficiary at any time, so if your circumstances change, you can update it accordingly. You shouldn't wait to do this; it should only take a few minutes.
Consolidating your accounts allows you more investment flexibility as well as a better picture of your retirement goals. Follow these simple steps to begin the process:
- Confirm that your current retirement Plan accepts the type of retirement account you want to roll over. IRS Rollover Chat
- Request a direct rollover distribution from the previous retirement plan. Make sure the check issued is made payable to the Custodian or Trustee for the benefit of (FBO) your name. This ensures that the funds are moving from one bank to the next, disqualifying it as a taxable event.
- Contact your plan administrator and/or your service provider to request an incoming rollover form.
If you need any assistance, please contact us today!
Your retirement plan may or may not allow loans, in-service withdrawals, or hardship withdrawals. Feel free to reach out to our Financial Wellness Center, and we can share with you details and provisions specific to your plan regarding loans and withdrawals. You should also refer to your plan documents for more information.
When you leave your job, you have several options on what you can do with your retirement plan at your former employer. It’s important to understand your options.
Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 72. The annual deadline for taking your RMDs is December 31. However, it’s possible to delay taking your first RMD until April 1 of the following year you turn 72.
Generally, a RMD is calculated for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that IRS publishes in Tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). Choose the life expectancy table to use based on your situation
“Vesting” simply means ownership and refers to how much of the assets in your account you own. You are always 100% vested in your salary-deferral contributions. If your employer makes contributions to your account, you will earn ownership rights to them, including any earnings they may generate according to the vesting schedule set by the employer. These schedules can range from 100% vesting after 3 years of service to a 6-year graded vesting schedule. Always refer to your Summary Plan Description for details and if you have questions, feel free to reach out to our team!
Engaging in a 401(k) can seem like a lot of work, but it is a valuable retirement savings tool that provides tax benefits, easy payroll deductions, and various investment options. Understanding the basics ensures you get the most out of your retirement plan. You're not alone in this process; our financial advocates are here to help! If you have any questions, please reach out today!