Setting Up and Optimizing 401k Contributions at Work

Is 2017 the year you set up a 401k plan? 

A 401(k) is a financial plan set up for your future. The idea is that contributions made to 401(k) plans now can pay off later when you’re ready to retire. If you’ve never had a 401(k) before, it may seem a tad overwhelming to review and digest all the benefits and rules that come with setting up and maintaining an account. To make it simpler to comprehend and easier to get started, here is a basic, step-by-step guide with a few helpful tips.

Review and Select a 401(k) Plan

How does a 401(k) plan work with an employer? If your company offers a 401(k) option, most likely they will pre-select a plan (or plans) for you to choose from. Your human resources director and/or 401(k) provider will schedule an enrollment day where they will walk through the plan with the company and answer any general questions that may arise. Common questions might include how much you can contribute each year, how much your company will match your contribution to 401(k) plans, and differences between traditional and Roth 401(k) plans.

Let’s answer a few of these questions immediately. The contribution limit for employees who participate in 401(k), 403(b) and most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged in 2017 at $18,000. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan also remains unchanged at $6,000The limit on annual contributions to an IRA also remains unchanged at $5,500. Retirement plan limits for the Tax Year 2017 are in the chart below.

Have a unique situation and want clarity about your options? Set aside one-on-one time with your HR director to ensure you have a firm grasp of what you’re signing up for and the benefits you can expect to receive from your 401(k) plan such as previously mentioned 401(k) employee contribution matches.

Set Up Automatic 401(k) Contributions

Not sure what your 401(k) employee contribution should be? Ten percent of your salary is generally a good jumping off point, but make sure you factor in your complete monthly budget, expenses, and income when deciding what amount you feel most comfortable with transferring to your 401(k) plan.

Anything you contribute to your plan is considered pre-tax money, so think about factoring in your 401(k) contribution first when determining your monthly budget. Then, automatically schedule your contributions from your paycheck to eliminate hassle and temptation to spend that budgeted money once it hits your account.

Diversify Your Portfolio

Review your investment options with your 401(k) provider and think about picking a mix of stock funds, bonds, and cash that match your personal level of risk. If you prefer low-risk options, communicate this ahead of time with your financial planner or company contact.

One thing to keep in mind is not to invest too much into your own company stock, if that’s an option, because you don’t want to tie too much of your savings for retirement to your company. Voice any concerns with your portfolio and only go as high of risk as you’re comfortable with.

Traditional 401(k) vs. Roth 401(k)

A Roth 401(k) is a retirement plan option similar to a traditional 401(k), but you pay the tax up front. Anything you contribute to your fund on a paycheck or monthly basis will be taxed, but it means you won’t have to pay taxes when you take out the money at retirement. With a traditional 401(k), you will need to prepare for that tax rate when you withdraw the money.

Keep in mind, with either type of plan, there is a penalty charge for taking your money out early. If you withdraw from your 401(k) prior to the age of 59 ½, you could be responsible for a 10% federal tax penalty fee.

Assess Opportunities Regularly

Check with your 401(k) plan provider if you want to make any adjustments to your plan. Life events may require you to free up more money for a short period of time when you’ll want to limit your contributions or vice versa. You’ll want to review penalties, if any, and discuss if adjusting your 401(k) is the best idea for your budget. There may be other areas to reassess your financial contributions which may better benefit you.

Always confirm with new employers that they accept rollovers and what the process is for moving forward. Your 401(k) contributions are most likely automatically deducted from your paycheck, so if your paycheck source changes, so will the way you contribute to your 401(k).

Whether you are starting your first 401(k) plan or simply want to review your portfolio from 2016, it’s always a good idea to get as much information as possible to plan for your future financial security.

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