Since their introduction in the early 1980’s, 401K’s have become one of the most popular forms of retirement savings. One reason for this is that the employee is in the driver’s seat when it comes to steering the investments.
First of all, 401K’s (and 403B’s, if you are employed by a non-profit company) are a pre-tax source of retirement savings. This means that you can have money taken directly out of your paycheck before the federal income taxes are calculated, thus putting you into a lower tax bracket. If you’re not careful, you could actually end up taking home more money in your paycheck with a 401K deduction than without one.
After your funds are withdrawn, your company may match a portion of what you are investing up to a certain percent, all on your behalf.
Let’s say that your paycheck, before taxes, is $1,000. Of this amount, you elect to have 6% ($60) put into your 401K. Your generous employer matches 50% (half) of what you put in, up to 6% (what you’ve already put in). So, each pay period, you put in $60 and your employer puts in $30 for a grand total of $90 that’s tucked away for your retirement each and every pay period.
With this money, you’ll be deciding exactly where you would like your investments to be, taking into consideration the risk factors involved, your age, and exactly what your plans for retirement are. Your plan’s provider will be more than happy to assist you in making the best financial decision for you based upon their criteria.
So, How Do I Get Paid?
There are three main options for reaping the benefits of your savings after you’ve retired. Keep in mind that no matter which option you choose, withdrawing funds from such an account before you turn 59 ½ years old can result in some stiff penalties and unforeseen tax payments.
- Keep with your Current Program
- Move your Money to an Income Annuity or Rollover IRA (Individual Retirement Account)
- Take the Money and Run
By staying put, you will undoubtedly maintain your tax break plus avoid any fees that are associated with moving your plan. However, you may not be as “in control” of your investments as you once were and/or would like to be. Be sure to consult your plan administrator as to the particulars of your plan, keeping in mind that the feds will get involved with your retirement account when you turn 70 ½ years of age (referred to as an MRD, or Minimum Required Distribution), mandating some sort of withdrawal on your account by you by April 1 of that year.
First, Rollover IRA’s will shield your money from penalties and taxes, just as your original plan did. Mutual Funds, Stocks, Bonds, CD’s are just a few of your investment options.
A Rollover IRA will allow you to access your funds when necessary, sometimes with personal checks or an automatic withdrawal service. Appropriate fees and penalties will apply, as well as the prompt payment of income taxes on the withdrawn amount.
An Income Annuity is a great option if you are concerned about outliving your planned retirement funds. These types of programs are offered by insurance companies instead of a financial investment institution as IRA’s are.
This option, although seemingly a nice scenario, can wreak havoc on your funds solely from an income tax point of view. By withdrawing all of your money, an automatic federal income tax withholding of 20% will be assessed immediately. Combine this with other state fees and penalties (for example, if you take the distribution of funds before the age of 59 ½, the additional 10% fee will be added on), and your entire retirement fund could be eaten up in taxes before your eyes.
So yes, with a lot of planning and advice from your 401K plan administrator, living the fruitful retirement that you deserve so greatly is definitely possible.
