Saving for Retirement through Long-Term Benefits
Things to Consider When Saving for Retirement through Workplace Benefits
- 401(k) contributions are made from your paycheck with pre-tax dollars, meaning that you will not pay any income tax on those moneys until you take a withdrawal from your account
- 401(k) plans allow you to save a substantial amount toward retirement. Starting in 2015, you can save up to $18,000 each year. If you are age 50 or older, you are entitled to play "catch-up" and save up to $24,000 each year. If you were not able to save for retirement when you were younger, this is your chance to catch up!
- Employers will sometimes match a portion of the savings that you make in your 401(k), typically 1% to 5% of your annual salary. Try to save as much as you can to qualify for the match – otherwise, you are leaving free money on the table
- It is important to leave your savings in your 401(k). Early withdrawals before age 59 1/2 can result in a 20% tax withholding and 10% early withdrawal penalties.
- Once you reach age 70 1/2 you need to start taking the Required Minimum Distributions each year. Failure to do so can lead to a 50% federal income tax!
Tips on How to Save Smart for Retirement
- Start now. Don't wait. Time is critical.
- Start small, if necessary. Money may be tight, but even small amounts can make a big difference given enough time, the right kind of investments, and tax-favored vehicles such as company retirement plans and IRAs.
- Make automatic deposits from your paycheck or checking account to mutual funds, IRAs, or other investment vehicles.
- Save regularly. Make saving for retirement a habit.
- Be realistic about investment returns. Never assume that a year or two of high market returns will continue indefinitely. The same goes for market declines.
- If you change jobs, keep your retirement savings in your former employer's plan or roll it over into your new employer's plan or an IRA.
- Don't dip into retirement savings.
How To Make The Most Of A Defined Contribution Plan
- Study your employee handbook and talk to your benefits administrator to see what plan is offered and what its rules are. Read the summary plan description for specifics. Plans must follow federal law, but they can still vary widely in contribution limitations, investment options, employer matches, and other features.
- Join as soon as you become eligible. Sometimes you have to be employed for a minimum amount of time before you can become eligible.
- Put in the maximum amount allowed.
- If you can't afford the maximum, try to contribute enough to maximize any employer matching funds. This is free money!
- Carefully review the menu of investment choices. Some plans offer only a few choices, while others may offer hundreds. The more you know about the choices, investing, and your investment goals, the more likely you will choose wisely.
- Many companies match employee contributions with stock instead of cash. Too much of a single stock increases risk. Find out if some of your contributions can be matched with cash to diversify.
- Plans that allow you to direct the investments often include fees that reduce the amount of retirement benefits you ultimately receive. It's in your interest to learn as much as you can about your plan's administrative fees, investment fees, and service fees. Read the plan documents carefully. For more information on fees, call Employee Benefits Security Administration's toll-free line at 866-444-3272 and request the booklet A Look at 401(k) Plan Fees.
- Your retirement plan may allow you to borrow from your account, often at very attractive rates. However, borrowing reduces the account's earnings, leaving you with a smaller nest egg. Also, if you fail to pay back the loan, you could end up paying income taxes and penalties (10 percent to as high as 35 percent) and a 10 percent penalty may be tacked on if you're younger than age 59½. In addition, you may have to pay state taxes. If you're in a SIMPLE IRA plan, that early withdrawal penalty climbs to 25 percent if you take out money during the first 2 years you're in the plan.
- Avoid permanently withdrawing funds before retirement. This often happens when people change jobs. According to a study by the Employee Benefits Research Institute, only 46% of workers changing jobs rolled over retirement savings into an IRA or a new employer's retirement.
Taken From: http://www.dol.gov/ebsa/publications/savingsfitness.html