A 401(k) is commonly provided by employers to assist their employees with saving for retirement. It provides a tax-sheltered environment that workers can use to maximize their post-retirement dollars.
Often an employer will match (up to a certain percentage) the dollars that an employee sets aside in the fund each month. A certain amount of financial planning is involved in setting up a 401(k) retirement strategy.
How Does a 401(k) Work?
Every 401(k) allows an individual to set aside money in a fund up to a maximum amount defined by the IRS each year. As withdrawals are made from the fund after retirement, taxes are imposed.
However, the money grows over time from the time of deposit to the time of withdrawal as the value of the investment increases. A 401(k) is one of the best retirement options available to secure finances.
How Much Should I Contribute to My 401(k)?
The amount that you should contribute to your 401(k) varies based on your personal situation. Some individuals may have more income available to invest; others may be limited due to life circumstances.
A good rule of thumb is to invest as much as your employer is willing to match. For example, if the employer matches your investment up to 5% of your income, you should try to make contributions of at least 5%. This approach means that at the end of the year, you will have saved 10% of your annual income in your 401(k).
What Is the Maximum Amount I Can Contribute to My 401(k) in 2022?
The IRS has limited 401(k) employee contributions to $20,500 for 2022. If your employer also contributes to your 401(k), aggregate contributions may not exceed 100% of your salary or $57,000 ($63,500 if you’re over 50).
The transparency of a 401(k) plan allows for clear investment decisions to be made for retirement purposes.
When Can I Begin Withdrawing Money from My 401(k)?
If you have not reached the age of retirement required to withdraw funds, you will be subjected to high taxes and penalties. For 2022, taxes charged on an early withdrawal include your current marginal tax rate plus a penalty of 10%.
It is typically best to exhaust all other financial options available to you before withdrawing money from a 401(k).
Once you have reached the retirement age of 59½, you may withdraw funds from your 401(k) on a regular basis. However, you are not legally obligated to take distributions from your 401(k) until age 72. This option means that you may continue to allow your money to grow after age 59½ if you do not need it immediately.
Next Steps
If you are concerned about having enough money saved for your retirement and want some assistance in the financial planning process, reach out to us. We can ensure that your personal 401(k) planning strategy meets your retirement goals.