A secure retirement is possible even if a traditional pension isn’t in your future. Statistics show that 31% of Americans have $5,000 or less saved for retirement. Out of those that do have a retirement fund, over 60% fear that they’ll outlive their retirement.
Maximizing your 401k plan in 2019 will help set you on the right path for retirement.
The first and most important step is to take advantage of your employer’s match. Employers can offer their own match percentage, but a typical match is 50 cents for each dollar, up to 6% of pay. Every employee’s goal should be to save up enough money to max out their employer’s contribution. Ensuring that your employer is matching your 401k will be the fastest way to boost your retirement.
A 401k for small business is setup to be advantageous to the employer, and this means that you may have to stay in your position for five to six years. The way this works is that if an employee leaves before they’re fully vested, the employer will have the right to keep some or all of the match that they contributed to the account.
If the work environment is bad for your career or other, better opportunities appear, it may be best to leave with the unvested amount.
Defer as much income tax as possible
Traditional 401k plans allow you to defer some of your income, and this means that you’ll pay less in income tax this coming tax year. Contribution limits for 2019 have been increased to $19,000 for a 401k and $6,000 for an IRA.
Savers tax credits allow for individuals to save an additional $1,000 for low-income individuals earning less than $32,000, or $48,000 if you’re a head of the household and $64,000 for couples.
Don’t plan on cashing out
If you’re going to be making a career change, you should not cash out on your 401k with your former employer. Cashing out for anyone that is younger than 59 and a half will result in a 10% withdrawal penalty.
Income tax will also be assessed for the withdrawal, so you’ll greatly reduce the amount of money you saved for your retirement immediately upon withdrawal.
Let's not even talk about losing the benefit of compound interest. The money put into a 401k should be reinvested and not seen as your money until retirement age. The goal is to save as much money as you can during your youth to fund your retirement.
Rollover your 401k without fees.
Risk tolerance needs to be considered when choosing what to invest in with your 401k. If the fees for the 401k are too high, it may be worthwhile to put money into an IRA. This is maximized by funding the 401k until the employer’s contribution is maxed and then starting to put money into an IRA, which can offer a deferment of $6,000 in income tax.
The risk of the account should be lowered the closer you come to retirement, diversifying into less volatile options to preserve your capital for retirement.
