What is a 401k?

Last Updated on 2nd February 2022 by Jeffrey Camerda

A 401k is a retirement savings account that allows you to save money for your golden years. Contributions are made pre-tax, so you can lower your taxable income each year. The money grows tax-free and you can withdraw it without penalty once you reach the age of 59 and a half. A 401k is a great way to save for retirement, especially if your employer offers matching contributions. 

How much money should I save for retirement?

This is one of the most common questions that people ask themselves when it comes to saving for retirement, but there’s no simple answer because everyone has different financial circumstances. Generally speaking, the younger you are when you start saving for retirement, the less you need to save each month so that your nest egg lasts throughout your lifetime. But if you’re not very young anymore and don’t have much saved up yet, don’t worry! It’s never too late to start investing for your golden years. That being said, it’s always better to take action sooner rather than later.

How much can I contribute?

It’s important to find out how much you can contribute before you open a 401k plan at your workplace. The amount that you’re allowed to contribute is based on limits set by the federal government, but it varies according to your age and salary. Here are the current contribution limits:

Employee contribution limits are 19, 500 dollars per year for workers under 50 years of age in 2021, and 20500 dollars per year for workers over 50 years of age in 2022. The catch-up contribution for people aged 50 and over is $6,500 in extra contributions between 2021 and 2022.

Employers or employees can contribute additional non-deductible after-tax money to traditional 401(k) accounts. The total contribution amount is the sum of the employer and employee contributions for the year.

2021

  • A worker under 50 years of age must pay at least $58,000 in employer-and-employee contributions, or 100% of employee compensation, whichever is lower.
  • For those over 50, the contribution limit is $64,500 when you include the catch-up contribution.

2022

  • Workers under 50 can contribute no more than $61,000 per year to their employer as a total.
  • There is a limit of $67,500 for those age 50 and over, including their catch-up contribution.

If you want to get an idea of how much money you’ll need for retirement, use our retirement calculator . You can also see what happens if you start saving at different ages using this additional calculator .

Can I take my 401k with me when I change jobs?

There are several options available for withdrawing funds from your 401k once you’ve retired or reached 59 and a half years old , but you’ll need to check with your plan administrator about what will happen to the money. Your 401k is 100% yours, so if you change jobs or retire, you can roll it over into an IRA without any problems. But some companies do have policies in place that require employees to leave their 401k plans with them when they change jobs. In this case, you certainly won’t be able to take the money with you – but if there’s a financial penalty for withdrawing your funds early, make sure that you understand all of the rules before leaving your employer.

Is my 401k safe from bankruptcy?

In most cases, retirement savings accounts like a 401k are protected from creditors during a bankruptcy . This means that even though other types of savings and investments might not be safe from seizure, the money that you’ve saved for retirement will remain yours.

What happens if you don’t contribute to your 401k plan?

If you choose not to contribute to your 401k plan, not only will you miss out on the opportunity for tax-deferred growth of your money, but you’re also more likely to be in the same or a lower tax bracket when you retire because more of your income will be taxed at ordinary rates. You might also have less money saved for retirement than if you had contributed regularly throughout the years.

Why should I contribute?

The best reason why contributing to a Gold and Silver 401k plan important, Is that it’s an easy way to build wealth over time. If your employer offers matching contributions, then it’s like getting free money – and even though it’s called “free”, that money has still been earned with hard work! You can’t afford not to contribute if your company offers matching contributions.

How do IRS rules apply to 401k plans?

You are allowed to make pre-tax salary deferrals of up to $17,500 for 2014 ($23,000 if you’re age 50 or older). Your employer can choose to match these contributions on a dollar-for-dollar basis, or they can choose to make non-elective contributions equal to 3% of your salary. If the latter is chosen, then this is also tax deductible on their end.

The benefits of contributing to a 401k plan:

1) Tax Deductions:

Contributing to a 401k is an excellent way to make your money grow with compound interest, and in most cases you can receive tax deductions for the contributions that you make.

2) Employer Matching Contribution:

Many employers also offer matching contributions as a reward when employees contribute to their plans. This raises the amount of money that you’ll earn in interest during your working years and sets you up for greater financial success upon retirement!

3) Investment Options:

401k plans often come bundled with several investment options such as stocks, bonds, index funds , etc. The variety of different fund options allows investors to diversify their portfolios so that they have less risk . It’s important to take advantage of these options and diversify your money to protect yourself against market fluctuations.

4) Stable Account:

The money that you put into a 401k is protected by the Employee Retirement Income Security Act (ERISA), which means that it is rarely accessible during times of financial crisis. This act protects your account by making it less likely for anyone to withdraw funds early or abscond with all of your funds (which can happen if you keep your money in an ordinary brokerage account). 5) Tax Deferred Growth: A 401k plan grows tax-deferred, meaning that when you’re ready to retire and start taking distributions from the plan, they will be taxed at the current rate instead of at whatever higher bracket you might fall into at the time. 

Although there is a 10% penalty for money withdrawn before the age of 50, your contributions are not accessible until retirement either. This allows you to earn interest on your money without having to pay taxes on it each year. 6) Loan Option: Since 401k plans are so difficult to access, creditors consider them very safe when considering lending borrowers money. You can often take out loans against these accounts with minimal paperwork and then repay the loan back into the plan whenever you want – this makes borrowing money much more simple than it would be under other circumstances.

7) Change Employers? Not a Problem:

Since 401k plans are sponsored by employers, they automatically transfer from job to job if you decide to change companies. All you have to do is fill out the proper paperwork and your new employer will usually match your contributions or at least continue offering you the same investment options – this makes changing jobs far less stressful because it’s relatively easy to transfer one account into another.

8) Spousal Rights :

This varies by state, but generally 401k plans are protected under “spousal rights” which means that they can be passed onto a spouse if one were to die. Depending on state laws, 401ks are sometimes exempt from being divided during divorce proceedings as well.

 

Jeffrey Camerda

Dr. Jeffery Camerda, PhD, is a financial planner who specializes in wealth management and retirement planning.With a PhD in Economics and Financial Planning, Jeffery represents the highest level of financial planning expertise and achievement in the USAIn addition to preparing you for a career in financial planning, a PhD in economics and finance also prepares you for academic pursuits, such as becoming a university professor in teaching or doing research.Here at the Wealth Builder, our financial advisory company was founded in 2007 and services all across the USA with over 16 years of expertise.In order to provide the finest advice and services, we pay close attention to the specific financial circumstances and requirements of each client.In order to guarantee that our clients don't get a sales pitch for insurance or investments, as well as a lack of conflict of interest from a prospective commission-bearing corporations, Jeffery focuses on fee-based services. Financial planning for wealth managers, financial well-being workshops, and personal financial planning packages are all part of the company's offering.Jeffrey Camarda, PhD, CFA, EA is also the founder of the Family Wealth Education Institute, is a member of the Financial Planning Association and serves as the Chairman of Camarda Wealth Advisory Group

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