An employer-sponsored 401k plan is the retirement planning centerpiece for many American workers. If you have one, it may be the ideal home for your retirement “nest egg.”
Republic Wealth can help you maximize the advantages of your 401k or other tax-advantaged retirement accounts like a 403b, 457, IRA or Roth IRA.
What is a 401K? How do they work?
The name “401k” comes from a provision of the U.S. tax code that allows private employers to offer tax-deferred retirement savings plans for their workers.
If your company offers a 401k, you can have pre-tax money withheld from your paycheck and sent to an individual account under your name. You employer may add to the amount you save, too.
What are the tax benefits of a 401k?
The money you contribute to the 401k reduces your taxable income in the year you make it. For example, if your gross wages (after Social Security and Medicare taxes) are $100,000 per year and you direct $10,000 into your 401k, your taxable income would be only $90,000.
You also won’t pay tax on the earnings inside your 401k account until you reach age 59 ½ and begin withdrawals. This allows your retirement savings to compound faster. This can potentially reduce your tax payments by thousands of dollars.
Our online 401k Savings Calculator can help you show you a 401k account’s potential benefits.
What is a Roth 401k?
Like a Roth IRA, the Roth 401k is a variation in which you make after-tax contributions and can then make tax-free withdrawals later. This provides tax diversification and can also allow high wage earners who are otherwise ineligible to make contributions still receive tax-free growth.
Employee 401k contributions can be either pre-tax, Roth, or a combination of both.
Unlike a Roth IRA, a Roth 401k has no upper income limitations. Employees of any income level can make Roth 401k contributions.
What is a “401k match?”
Employers sometimes encourage 401k participation by “matching” the worker contributions. For example, a company could offer to match the first 5% of wages you invest in your 401k. In that scenario you would save 5%, the employer would add another 5%, and 10% of your income would go into your 401k account.
The 401k match may be one of the best “investment” opportunities you ever see – earning you up to a 100% return on the amount of money you save and your employer matches.
>Employer matching contributions are always pre-tax, i.e. tax-deferred.
How much can I save in my 401k?
The maximum tax-deferred employee contribution is $18,000 for tax year 2015. The IRS indexes the amount for inflation, so it may be higher in the future. Employees age 50 and over (by year-end) can defer an additional $6,000 per year “catch-up” contribution on top of the $18,000.
Employers can make additional contributions on top of the $18,000 employee deferral, but are not required to do so. The law also limits the amount certain “highly compensated” employees can save in a 401k.
Your company’s human resources department can tell you more about 401k contribution limits, matching programs, and other limitations.
What happens to my 401k money if I change jobs?
You have several options. You can leave the funds in your former employer's plan, “rollover” the 401k balance into an Individual Retirement Account and preserve its tax-deferred status, or transfer your money to a new employer’s 401k plan.
Keep in mind that matching contributions made by your previous employer may be subject to “vesting” rules. You might have to return amounts that are not yet “fully vested.”
You can also withdraw the 401k balance and take it in cash, but the amount withdrawn will be taxable income immediately and you will lose the value of future tax deferrals. This is almost never a good idea. There are pros and cons to each of the above options. Please consult a financial planner or tax advisor to determine wihch option is most appropriate for your individual situation.
How much can I expect to earn in my 401k?
This is the best part of a 401k. Your investment results are up to you! Employers typically offer a selection of mutual funds representing various asset classes (stocks, bonds, etc). You can choose the asset allocation strategy that works best for your age, circumstances and retirement expectations.
Many companies also offer an expanded investment line-up through a “brokerage window” option. This feature gives employees the open architecture of a standard brokerage account. Those who choose it are not limited to the employer’s limited investment menu.
Republic Wealth offers management programs for 401k investors, either with or without a brokerage option. We may already be helping others at your firm. We have worked with Apple, BHP Billiton, Cigna, Phillips 66, Regions Bank and others. Ask us for details.
How can Republic Wealth help manage my 401k?
Many workers don’t feel confident in their ability to make investment decisions for their 401k money. If so, you can consider working with a Registered Investment Advisor like Republic Wealth. We can look at your situation, help you define the right goals and then implement a suitable investment strategy.
- If you still work for the company that sponsors your 401k, you can usually choose the “self-directed brokerage” option and give Republic Wealth authority to manage your account for you. We currently or previously have offered this service to employees at 3M, Apple, Beck Group, BHP-Billiton, Cigna, Phillips 66, Regions Bank and others.
- If you already rolled over your 401k balance into a traditional IRA or Roth IRA, Republic Wealth can manage your account through our Fidelity Investments custodial partnership.
- If you are near retirement age, between jobs or otherwise unsure, we can help you consider all the alternatives and make the best choice.
Can’t I manage my 401k or IRA for myself?
Yes. You don’t have to use an investment advisory firm like Republic Wealth. You can make all the investment decisions yourself. Many investors prefer to focus on their own occupation and delegate ongoing investment management to a specialist.
How do I get started with Republic Wealth?
We always begin with a complimentary consultation. Like any other professional, we need to know more about your circumstances so we can make the best possible recommendations. We also want you to know us and feel confident establishing a long-term relationship.
Contact Republic Wealth Advisors today to discuss the management of your retiremnte account. We can be reached in Austin at 512.506.9395 or in Houston and The Woodlands at 281.408.2538.