Learning to manage your 401(k) can provide huge benefits
The creation of 401 (k) plans was essentially an accidental byproduct of the Revenue Act passed by Congress in 1978. This act included a provision that was added to the IRS Code (section 401 (k) allowing employees to avoid taxation on deferred compensation.
A savvy benefits consultant named Ted Benna came up with the idea that would allow employees to save pre-tax money into retirement plans that an employer would then match.
Subsequent rule changes by the IRS allowed employees to fund 401(k’s) through payroll deductions; a considerable improvement that virtually guaranteed that 401(k) plans would be popular with both employers and employees.
Currently, more than 55 million Americans participate in 401(k) plans, which have evolved considerably over the past few years. If you have a 401 (k), you should become acquainted with your options and learn ways to maximize what is likely to be a very critical part of your future retirement plan.
Maximum contribution limit changes for 2018-2019
Financial advisors often counsel their clients to contribute the maximum to their 401 (k) plans. You should be aware that those limits have changed and will continue to change in the coming years.
401k/403b/457 contribution limits will increase $500 (from $18,500 in 2018) to $19,000 in 2019.
“Catch-up” contributions for those age 50 or over will remain at $6,000 in both 2018 and 2019. Profit-sharing and employer match contributions are not included in these limits. 401k and 403b share the same limit.
If you have a 457 plan, your limit is separate, and you are allowed to contribute to both a 401k/403b plan and a 457 plan.
The total employer and employee contributions to all defined contribution plans administered by the same employer increases to $56,000 in 2019, with the catch-up contribution on top of this limit.
You don’t need to go it alone.
Some of the initial excitement around 401(k) plans rested on the idea that individuals could now control their financial destinies and no longer be at the mercy of corporate decisions when it came to their investments.
Unfortunately, however, it’s been established that many, if not most, employees lack the temperament, knowledge, and skill sets needed to maximize their 401(k)’s successful. In the past, employers were loathed to connect employees to professional advisors due to liability concerns. In 2006, the Pension Protection Act addressed the need for sound professional advice as well as employer concerns about lawsuits. Now, if an employee loses money in a plan, employers are not liable. This leaves companies free to provide their employees with education materials and access to financial experts. Unless you have exceptional expertise in managing retirement plans, it’s a very wise idea to take advantage of the guidance offered by your employer and their agents.
Time for a Roth?
If you are someone looking for a more secure financial future, attractive tax benefits, easier access to your funds, and retirement income benefits, you definitely should speak to your trusted advisor about using a Roth IRA.
Roth IRA’s, although they have been around for quite some time, are still one of the most underutilized retirement savings and investment vehicles. An extremely flexible financial tool, Roth IRA’s can help you save for the future while retaining access and control of your funds. Roth’s are funded with after-tax contributions that are then placed in an investment you select. As these investments produce returns, you are not taxed on any of the gains.
For people who believe that their tax liabilities will increase in retirement, a Roth is a logical choice. Your account will grow tax-free, and you’ll get tax-free income withdrawals during retirement, provided you are at least 59 ½ and have had the account for five or more years.
Talk to your financial planner today to see if converting to a Roth makes sense for you.
No time to manage your 401 (k)?
If you’re like most people, you’ve got a lot going in your life; perhaps too much to keep a close eye on your 401 (k.) However, it’s also important to leave to chance. Fortunately, if your plan is serviced by one of the big investment firms such as Fidelity or Schwab, you have another option. You can now request to have your 401(k) directed by a money manager who will rebalance the investment mix of your 401(k) to manage risk.
Start now with”Autopilot” 401(k)s.
It’s not too late to begin investing in your company’s 401 (k) plan. Even if investing scares you, many companies can now automatically enroll you in a 401(k) as soon as they hire you. An in-house employee benefits manager may pick the investment mix and contribution levels for you if you decide you do not want to do it yourself.
To sum it up: 401 (k) plans can be a great way to increase your income stream when you retire, plan a legacy for loved ones, and avoid paying more tax than you need to. However, 401 k plans do have certain requirements and nuances that must be met to get the most from them.
If you’re not sure which of these options is best for you, consider speaking with a professional who can help to guide you.
All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further details.