Retirement planning is an essential component of any comprehensive end-of-life plan. Despite that fact, many people fail to take this planning as seriously as they should. If current estimates are correct, more than half of all American adults have less than $10,000 saved for their own retirement needs. That abysmal savings pace will leave many future seniors without the funds they need to maintain their current standard of living – and could dramatically impact their ability to leave their loved ones a financial legacy with real value. For workers with access to a 401k plan, however, that danger can be minimized. If you haven’t yet taken advantage of your company’s retirement plan offering, the answers to some of these 401k questions may help to motivate you to do so.
How much can workers contribute to their plans?
One of the most important questions that is often asked by workers interested in the 401k is also the most obvious: how much can an individual contribute to his plan? The 2017 contribution limit is set at $18,000 for the year – but workers age 50 or older can contribute an additional $6,000 for what is known as a “catch-up” contribution. However, when various forms of employer contribution are also added into the mix, the maximum contribution limit rises to as much $54,000 for workers younger than 50, and $60,000 for older employees.
How much should you try to contribute?
The most difficult challenge most employees encounter involves determining the exact amount that they can contribute. The reality is that there is no set amount that you need to contribute, since everyone’s situation is different. However, the success of your retirement planning effort will ultimately be determined by your commitment to saving for those post-work years. With that in mind, it is always wise to save as much as you can during your working life, even if it means making certain sacrifices now to provide a more secure tomorrow. At the very least, you should commit to contributing enough to benefit from any matching contribution efforts from your employer.
What is “vesting” anyway?
Vesting is a term that is used to describe your ownership of the assets in your account. There are two things to remember when you think about how well-vested you are in your 401k assets. The first involves the contributions that you make to the account on your own. You always have 100% vesting where those contributions are concerned, and retain ownership of those funds at all times. The second consideration involves the funds contributed by your employer, where vesting can occur at a different pace.
In some cases, employees become vested in those employer contributions over the course of three years, while others might take as long as five. The actual pace is determined by the vesting rules set up by the employer, and can provide an incentive for employees to remain with their current companies to ensure that they obtain full ownership of those contributions. If you’re curious about the vesting rules used for your company’s 401k plan, consult with the person charged with administering those benefits.
What happens if you switch jobs?
Many people wonder about how their 401k works if they switch jobs. It’s a valid concern, and one that deserves an answer. With most accounts, you’re free to leave your money where it is, if your contribution level meets the plan’s minimum threshold. If not, you always have the option of rolling the account over into an Individual Retirement Account, or IRA – or even rolling it over into your new employer’s retirement plan option, if one exists. The one thing that you don’t want to do is cash out of the account.
Are there tax advantages?
Another great reason to contribute to a 401k plan is that these contributions receive an exclusion when you file your federal income tax forms. That’s right: your contributions to the plan reduce your taxable income at the federal level, and you don’t even need to itemize to take advantage of those benefits. The exemption will be reflected on your W-2, which helps to ensure that your tax filing isn’t any more complicated than necessary.
Can you borrow money from your 401k?
More than eighty percent of employer plans do allow you to borrow money from your 401k account. In most instances, the rules are simple: you can borrow as much as half of your 401k balance – up to $50,000 – and then repay it with interest. Still, the more important question is whether you should ever borrow money from your retirement plan. On that count, the answer is generally no.
Remember, your retirement account relies on compounded growth over time to achieve your broader goals. When you remove wealth from the account, you also slow that growth and throw your long-range plan out of alignment. Worse, failure to repay the loan on time can result in sizable penalties. As a rule, then, the wise thing to do is to avoid borrowing from your own 401k plan unless it’s absolutely necessary to do so.
How does this help with my estate planning?
That’s an important question to consider. In the end, your estate plan is only as good as your ability to gather and protect wealth over the course of a lifetime of work. Without success in those areas, you won’t have much of a financial legacy to worry about, since your retirement years will be spent struggling to maintain your existing standard of living – something that is almost impossible to do if you’re relying on Social Security. Your 401k plan can provide a foundation for the type of retirement that can help to solidify your comprehensive estate plan.
The fact is that none of us can afford to neglect retirement planning, so the answers to these types of 401k questions should be of vital interest to every American. At the Kulas & Crawford, Medicaid & Estate Planning Attorneys, our team of retirement planning professionals can help you to find the best options to secure the retirement you deserve. If you’re ready to learn more about how your 401k plan can strengthen your estate planning efforts, contact us online or call us today at (772) 398-0720.