Retirement is a looming prospect for many employees, which is why so many employers provide the option to invest in a 401-K plan. In 2013, there were 88.7 million Americans investing in a 401-K plan; in some cases, you could be relying on this fund after you retire. It’s no wonder that there are more than 630,000 plans being offered by employers across the country. Because a 401-K plan is such a huge part of employment for many Americans, let’s examine a few things you really need to know.
There is no upper age limit on making contributions.
Traditional IRA contributions stop, regardless of employment, when you reach 70.5 years of age. However, for a 401-K plan, contributions don’t have to stop just because of your age. As long as you’re employed by a company that presents a 401-K plan, you’re able to make contributions for your retirement.
Taxes can get a little complicated.
When you contribute to your 401-K, you have the option of contributing pre-tax money or after-tax money. Essentially you get to choose between paying tax now or later. If you contribute pre-tax, then you get a tax break now – the year you make the contribution. Pre-tax contributions (and the growth due to capital gains and dividends) are taxed when you take out money as distributions in retirement. This makes sense if you are in a high tax bracket now and expect to be in a lower bracket in retirement.
If you contribute post-tax money (often called a Roth contribution), then you don’t get a tax break the year you make the contribution, but your retirement distributions are tax free. This works especially well if you are young, and you are in a low tax bracket because haven’t reached your earning potential yet. Young people can watch their money grow for decades and it will all be tax free when they need it in retirement.
If your employer makes a matching contribution (most of them do), make sure you contribute at least enough to get the free money! In some cases, you can get an instant 100% return. Employer contributions are always pre-tax, so you will have to pay tax on that money when you withdraw it in retirement. So your 401-K might have both a pre-tax bucket and a Roth bucket. The company that administers the 401-K will keep that straight for you.
Contribution limits are frequently adjusted due to inflation.
In 2016, workers who were 49 years of age or younger could contribute a maximum of $18,000 per tax year. This limit was $24,000 for any worker over 50. But this number changes every year due to inflation; the limit has steadily been increasing, so it’s likely you’ll be able to contribute more next tax year. Your 401-K plan is a very powerful tool when it comes to saving money for your retirement–but it’s also vital you know exactly what you’re allowed to contribute per year, in order to properly plan your financials.
The Harding Group can help you plan for your retirement today!
Are you having trouble working out your 401-K? Trust the professionals at the Harding Group. Unlike other accounting firms, we never charge you for emails or phone calls and strive for open communication with our clients. Whether you are interested in business advising, tax preparation, bookkeeping and accounting, payroll services, QuickBooks training, or retirement planning, we have the expertise and years of experience to help. If you are ready to take the stress out of taxes, contact us online or give us a call at (410) 573-9991 for a free consultation. For more tax tips, follow us on Facebook, Twitter, Google+, YouTube, and LinkedIn.