Make the Most Out of Your 401(k) Plan With These 3 Tips
Participating in a 401(k) plan is one of the best ways to save for retirement. With nearly 60 million active participants and $7.3 trillion in assets, 401(k) plans account for 20% of the U.S. retirement market. Stats like these show just how important 401(k)s have become in planning for retirement.
While enrolling in your plan is relatively simple and straightforward, managing your plan and making the right investment decisions for your situation can be a little more complicated. Here are 3 tips to keep in mind to make the most of your 401(k) plan.
Picking the investments in your 401(k) can be overwhelming and confusing. Often there is more than one option for each category. As a result, target-date funds have become popular choices recently, allowing participants the convenience of having their investments on autopilot in one fund based on a projected retirement date.
However, if you decide to split your allocation between a target-date fund and another mutual fund, you may leave yourself open to duplications in certain asset classes and have a completely skewed mix of assets. In addition, target-date funds offer a cookie-cutter solution for what may not be a cookie-cutter need. Each individual has a unique and personal situation that may require different asset mixes than the predetermined allocation of a target-date fund. When you choose this option, there’s no room for personalization.
While Roth IRAs put income limits on who can contribute, Roth 401(k)s do not. The question becomes, do you want to pay taxes now or in the future? If you expect to be in a lower tax bracket at retirement (which isn’t always the case), then the regular 401(k) is the option for you.
It’s impossible to predict the future, but all your pensions, Social Security, investment accounts, 401(k)s, and IRAs could add up and put you in a higher tax bracket. If that’s the case, then a Roth 401(k) would make more sense because taxes are due up front instead of in retirement. Even if you are willing to pay higher taxes in retirement, you should consider your spouse. If you were to pass away, they will have to file as a single person, which could increase their tax burden in retirement.
It’s important to know your limits. For 2023, you can defer as much as $22,500 into your 401(k). An additional $7,500 in catch-up contributions is allowed for those over 50.
One of the best parts of a 401(k) plan is that many employers offer matching contributions. The most common matching formula is 50% of employee contributions up to 6% of salary. This means your employer will contribute a maximum of 3% of your salary if you contribute 6%. Since employer matches are essentially free money and not considered income in the year received, it’s generally advised to contribute at least enough to get the maximum matching contribution.
Partner With a Professional
You’ll need to consider many factors when participating in your company’s 401(k) plan, and a little extra thought and consideration can make a big difference in your financial future. As with any important financial decision, it’s wise to first consult with an experienced professional.
At FSA Wealth Management, we have helped hundreds of clients achieve their financial goals and navigate complex financial decisions along the way. We frequently work with clients whose investment portfolios consist of multiple accounts, including 401(k) plans. We take a holistic approach to investment planning, and implementing the right strategy within your 401(k) is an essential step.
To learn more about how we can help you build your financial future and achieve the best life possible with the money you have, contact us today at 781-455-1020 or email email@example.com.
Greg Gohr is a Wealth Advisor at FSA Wealth Management, a Registered Investment Advisor firm offering fee-only services and known for its independence, objectivity, and results. With over 20 years of industry experience, Greg has extensive knowledge in all aspects of advisory platform business and specializes in helping individuals, families, small businesses, and professional organizations realize their financial goals. He desires to empower his clients’ financial well-being through the delivery of customized wealth strategies through every phase of the long-term journey. Before joining the financial services world, Greg spent the first 10 years of his professional life pursuing his lifelong dream of playing Major League Baseball. Like many professional athletes, his playing career was much shorter than he would have liked. After brief stints coaching at both the professional and college levels, Greg embarked on a career in financial services, determined to synthesize his lifelong interests in personal finance, investing, and coaching.
Greg graduated from Santa Clara University and completed his CERTIFIED FINANCIAL PLANNER™ coursework at Merrimack College and holds the Accredited Investment Fiduciary® designation. Outside of work, Greg, his wife, Kristen, and his dog, Sammy, aspire to climb all 48 4,000-footers in New Hampshire (they’re about halfway there!). A former rock-skipping champion of Waterville Valley, NH, Greg thinks bicycles are one of the most important inventions in human history and believes pizza is proof of intelligent design in the universe. His least favorite workplace memory is giving up back-to-back-to-back home runs in front of a sold-out stadium in Cleveland, he has a true gift for annoying his adult children—Jack, Hannah, and Kathryn—by constantly preaching the virtues of compound interest, and he is grateful to serve his community as a member of the Knights of Columbus. To learn more about Greg, connect with him on LinkedIn.
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