Your 401(k): 10 Things to Find Out

One of the best ways to start saving for retirement is to invest in an employer-sponsored 401(k) plan. These tax-advantaged plans allow employees to make direct contributions each paycheck. Knowing how your 401(k) works is an important part of understanding your retirement plan. Here are 10 things about your 401(k) to find out—

1. Whether Your Company Matches Contributions

Many companies will offer matching contributions up to a certain percentage. For example, if you contribute $100 each paycheck, your company may match up to six percent of that, or $6. Talk to your employer and find out the details as part of your strategy for maxing out overall contributions. 

2. If Enrollment is Automatic

If you’re starting at a new job that offers a 401(k) plan, then you should ask whether enrollment in the plan is automatic or if you’ll need to opt-in. Chances are that there will be at least some paperwork that you need to fill out, so keep an eye out. 

3. How Much You Can Contribute

Contribution limits are set by the Internal Revenue Service (IRS). For 2023, the amount that individuals can contribute to their 401(k) plan is $22,500. Because contributions come out of each paycheck automatically, you’ll need to do the math to figure out how much you can afford and whether you can make the maximum contribution each year. 

4. How You Can Increase Your Contributions

Talk with your employer to find out when and how you can increase your contributions. In most cases, you can increase your contributions at any time of the year; however, some employers may only allow changes to the plan once a year. 

5. Your Investment Choices

Most 401(k) plans will offer a variety of investment options. The option that you choose will depend on your age and how aggressive of a strategy you want to adopt. If you plan to let the money sit in your 401(k) for 20+ years, you may choose a more aggressive strategy; on the other hand, if you’re going to be retiring soon, a more conservative strategy is recommended. 

6. If There Are Penalties for Early Withdrawal (There Are)

If you withdraw funds from your 401(k) early, there are penalties. The money will be treated as income and you’ll need to pay taxes on it, plus an additional 10 percent penalty that’s assessed by the IRS. 

7. What Happens to the Money if You Leave the Company

If your employer has been making contributions to your 401(k), then they will get to take back any contributions that haven’t yet been vested. As such, you should talk to your employer about the vesting schedule. Many employers require that employees work for many years before contributions vest. 

8. When You Can Start Contributing

Depending on the structure of payroll, you may have to wait a pay cycle before you can start contributing to your 401(k). You want to start contributing as soon as possible, so talk to your employer. 

9. If You’re Responsible for Any Maintenance Costs and Fees

Most 401(k) plans are managed by a third party and therefore have maintenance costs and fees. While employers usually cover this, double-check to determine whether you’ll be responsible for covering any of these costs. 

10. Whether There Is a Roth 401(k) Option

A Roth 401(k) is similar to a traditional 401(k), except that in a Roth option, contributions are taxed and withdrawals are tax-free. 

Learn More from Harvest Wealth Partners Today

To learn more about 401(k)s and how a 401(k) can fit into your overall retirement plan, call Harvest Wealth Partners today.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

Contributions to a traditional 401(k) may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

A Roth 401(k) offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax.

This material was prepared for Harvest Wealth Partners financial advisor’s use.