Tax Advantage. Salary Deferral. Retirement Account.
These phrases get tossed around a lot when people talk about 401k plans. Our NYC and Philadelphia 401k advice professionals will help you take a closer look at what these terms actually mean.
In short, 401k accounts have a tax benefit. There are two types of 401k accounts, and they are taxed two different ways.
A traditional 401k is funded with pre-tax dollars. This money is put towards your retirement from your gross earnings. You’ve never paid taxes on it, and you set it aside and let it grow.
When you eventually do take it out, it is taxed just like salary. Take out $10k, pay income taxes on $10k.
A Roth 401k is a retirement account where you pay taxes on the money today before setting it aside to let it grow. Then later, when you are ready to tap into your retirement savings, the taxes are already paid (for the most part).
SalaryDeferral: Set It and Forget It!
Okay, to be clear, we don’t mean set it up and don’t glance at it ‘til 30 years later, then suddenly realize you made horrible investments. What we mean is that when you have an automatic percentage of your salary coming out of your paycheck, that’s a process that happens without you having to do it manually.
Just like money comes out of your check for FICA and Social Security, money comes out when you sign up for a 401k plan. You get to save money without even thinking about it!
If you’re under 50, you can contribute up to $19,500 per year If you’re 50 or over, you can add another $6,500 to that yearly cap.
A 401k is a retirement account that is between an employer and an employee, and it’s a long-term plan. It’s not about your short-term budget or your immediate needs; it’s a long-term plan with specific rules.
There are a few exceptions but, for the most part, if you pull from this account before the age of 59 and a half, you will be penalized. You’ll be taxed, as expected, but you’ll also be hit with a 10% penalty. Ouch!
If you encounter a situation where you believe you need to tap into your 401k funds early, talk to a professional financial advisor or tax professional before you do so you know exactly what to expect.
Should you do Roth 401k? Should you do traditional? How much should you contribute? These are all great questions, and we’d love to help you answer them!
Contact us today to schedule a retirement consultation. It’s never too early to get started. Find us in NYC and Philadelphia.
Millennial 401k Balance: What Should It Be?
If you’re a Millennial wondering what average 401 k balance you should have by this point in your career, it is important to start with figuring out your financial and retirement goals.
What does money mean to you? Do you want to retire by 40? Maybe you’re saving for a beach house. Once you realize what your goals are, take a look at your projections.
What is your income? What are your fixed expenses? What are your flexible expenses? How much can you save paycheck to paycheck?
It is important to remember that any little bit can help! If you only have an extra $25 per paycheck to contribute, do it. $25 a paycheck is $650 a year, let that work for your future rather than going to Starbucks!
What About a Target Date Fund? Do You Need One?
Target date funds are a convenient way to save for retirement. They’re based on the year you plan to retire. They are, in many ways, a “set it and forget it” retirement savings option.
Target funds are named after the year you want to retire, so if you want to retire in forty years, you’d pick a 2060 target fund. As we get closer and closer to the year 2060, the fund will get more and more conservative. It is a great way to get invested in a diversified way without having to manually rebalance.
What Should You Do If You Need to Access Funds Early?
If you feel like you need to tap into your 401k funds early, please talk to one of our 401k planning NYC or Philadelphia professional financial advisors first. Grabbing that cash can be really tempting when you feel stretched, but it’s never that simple. The tax penalties are a bear to deal with, and let’s not forget what you’re actually gouging with a withdrawal now: your future financial stability.
Have questions about saving for retirement? Our wealth management team is here to help you.
Should you do Roth 401k? Should you do traditional? How much should you contribute?
Rather than stressing about what you don’t yet know, or what you have or haven’t done up to this point, let our NYC 401k team and our 401k advisors in Philadelphia can help you get on track.
Call our NYC or Philadelphia financial planning office today to schedule a retirement consultation. It’s never to early to get started.