Longer life spans, more active retirements, rising costs and uncertainty over Social Security make the need for a substantial retirement nest-egg greater than ever. Luckily, many corporate retirement plans offer employees control over building that nest egg.
Benefits of 401(k) Plans
- Convenient Saving. Contributions each pay period make it easier to accumulate significant amounts over time.
- Employer Contributions. In most plans, the employer also "matches" some portion of the employee amount each period. Some employers also make contributions based on financial results.
- Tax Deferral. Employees are not taxed on the portion of their wages they contribute. Funds in a 401(k) plan are not taxed until withdrawn.
- Investment Flexibility. Plans often provide extensive investment options including mutual funds, company stock and other fixed income choices.
Making the most of your 401(k) plan
Retirement plan benefits will probably be one of your greatest sources of retirement income. Getting the maximum benefit from your plan is simple.
1. Participate in the plan. As simple as this sounds, some studies have found that many choose not to participate. Even minimal participation makes sense.
2. Contribute as much as you can. Your plan may have limits on the portion of your wages you may contribute. The annual limit for employee contributions has been increased to $18,000 for 2016 and 2017. In addition, a catch-up provision enables participants age 50 or above to make an additional contribution (up to $6,000 for 2016 and 2017). Determine what you can afford and make the largest contribution you can.
3. Get the entire employer's match. Review your plan to understand how the employer's contributions are made and allocated. Your Human Resources department should be able to help you.
4. Use a sensible investment strategy. Choose a combination of investment options that match your time horizon and risk tolerance. Generally, the longer time horizons and greater risk tolerance dictate a more aggressive investment strategy with greater use of equity investment choices.
Include your retirement plan in your financial planning
Your retirement plan should be an integral part of your overall financial strategy. Make sure you consider it as you design and implement an overall financial strategy.