401K
Does your work offer a 401K plan? Do they offer a match? Are you contributing? Do you have an IRA? Other investments? There are a variety of ways to save for your retirement and future, today we will discuss the importance of a 401K.
The 401K contribution increased to $19,500 for 2020 and the catch-up increased to $6,500. My company offers a 401K, as well as, a contribution match. JP and I both take advantage of this and plan to max out for 2020. For those of you who are unsure what a catch up is, a catch up is offered to those 50 years and older. They are allowed to do the max of $19,500 plus the catch up of $6,500.
So, maybe your company does offer it but you don't know what to do from there. Do you choose Roth or traditional? Which funds do you choose? What percent should you put in? Who is the beneficiary? These questions and others are valid and great questions. You can either do the research yourself and make your selections, which is what I did. You can also get with a professional to help answer your questions. Whatever way you choose to go, be sure you fully understand what you are doing. If you seek out help, don't just take their word for it, understand it and ask as many questions that you need to until you feel comfortable. If you don't feel comfortable, seek out a new professional to help you.
First, let's discuss the difference between a Roth 401K and Traditional 401K. You will need to know the difference and your own situation so you can see how they will affect you. A Roth 401K allows you to make contributions after taxes have been taken out. This way you receive tax free withdrawals when you retire. A Traditional 401K is pre-taxed, meaning your contributions go in before they are taxed. When you make withdrawals in retirement, you will then be taxed on those withdrawals. A Roth and Traditional also differ in accessibility. You have access to your Traditional 401K at 59-1/2 years of age. While a Roth, you have access after holding the account for at least 5 years, and distributions are accessible at age 59-1/2, disability or death. So, with a Roth 401K you are taking home less money on each paycheck and with a traditional, because your contribution is taken out pre-taxed, you are taking home more on each paycheck. The benefits of the Roth come when you are making withdrawals. While your employer contributions are taxed, the money you contributed plus it's growth is all tax free. In contrast, the traditional 401K contributions plus it's growth are all taxable at your retirement tax rate. An example, say you have $1,000,000 in your 401K at retirement. With a Roth 401K, that is all yours but with a traditional, you will be taxed at your tax rate. Say your tax rate is 20%, you just lost $200,000 in taxes. JP and I both contribute to a Roth 401K. A Roth has no income limit, meaning anyone can invest in a Roth 401K. If your employer does not offer a Roth, you should invest in the traditional and consider opening a Roth IRA. Keep in mind that a Roth IRA does have income limits.
Whether you have decided on a Roth or traditional, the next step is to decide which funds you want in your 401K. I follow Dave Ramsey and Chris Hogan's contribution advise. They recommend four kinds of funds: Growth, Growth and income, Aggressive Growth and International. This will allow you to diversify your 401K. Again, you can either go to a professional or figure out which funds to use. When you are logged into your account and choosing which funds, look up each of the funds and see which ones have a high rate of return over a 5 year, 10 year + period. You do not want to choose a fund that did well the last year but over a longer period of time has a low return.
How much should you contribute? That depends. I highly recommend everyone trying to invest between 15-25% of their income into retirement, but that does not necessarily mean it has to go thru your 401K. Maybe the fund options at your work are not that great. At the very least, no matter your circumstance, I recommend contributing your employer match. This is free money, take it! If you are comfortable with the funds provided in your 401K and can max it out, I recommend that too. But if you are in debt that overwhelms you and feel like your paycheck cannot stretch, contribute what you can but do not max out if your paycheck does not allow it. I think everyone should take a hard look at where their money is going and if you can cut back in an area in your life and contribute an extra $100 a month to your 401K, you future self will thank you.
The last thing I would recommend taking another look at is your beneficiary. Does your beneficiary on your 401K match what you have on your will? If you do not have a Will, you can check out my post on that and please get one today. If you have a Will in place that you have not updated in years, update it today. If the Kobe news has taught us anything, it is that life is short and your time can come at any second. Do not push this off, get it done.
Do you contribute to your 401K? Be sure to comment and subscribe.
The 401K contribution increased to $19,500 for 2020 and the catch-up increased to $6,500. My company offers a 401K, as well as, a contribution match. JP and I both take advantage of this and plan to max out for 2020. For those of you who are unsure what a catch up is, a catch up is offered to those 50 years and older. They are allowed to do the max of $19,500 plus the catch up of $6,500.
So, maybe your company does offer it but you don't know what to do from there. Do you choose Roth or traditional? Which funds do you choose? What percent should you put in? Who is the beneficiary? These questions and others are valid and great questions. You can either do the research yourself and make your selections, which is what I did. You can also get with a professional to help answer your questions. Whatever way you choose to go, be sure you fully understand what you are doing. If you seek out help, don't just take their word for it, understand it and ask as many questions that you need to until you feel comfortable. If you don't feel comfortable, seek out a new professional to help you.
Whether you have decided on a Roth or traditional, the next step is to decide which funds you want in your 401K. I follow Dave Ramsey and Chris Hogan's contribution advise. They recommend four kinds of funds: Growth, Growth and income, Aggressive Growth and International. This will allow you to diversify your 401K. Again, you can either go to a professional or figure out which funds to use. When you are logged into your account and choosing which funds, look up each of the funds and see which ones have a high rate of return over a 5 year, 10 year + period. You do not want to choose a fund that did well the last year but over a longer period of time has a low return.
How much should you contribute? That depends. I highly recommend everyone trying to invest between 15-25% of their income into retirement, but that does not necessarily mean it has to go thru your 401K. Maybe the fund options at your work are not that great. At the very least, no matter your circumstance, I recommend contributing your employer match. This is free money, take it! If you are comfortable with the funds provided in your 401K and can max it out, I recommend that too. But if you are in debt that overwhelms you and feel like your paycheck cannot stretch, contribute what you can but do not max out if your paycheck does not allow it. I think everyone should take a hard look at where their money is going and if you can cut back in an area in your life and contribute an extra $100 a month to your 401K, you future self will thank you.
The last thing I would recommend taking another look at is your beneficiary. Does your beneficiary on your 401K match what you have on your will? If you do not have a Will, you can check out my post on that and please get one today. If you have a Will in place that you have not updated in years, update it today. If the Kobe news has taught us anything, it is that life is short and your time can come at any second. Do not push this off, get it done.
Do you contribute to your 401K? Be sure to comment and subscribe.
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