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By Eric Rolshoven, MBA
Nothing beats a 401(k). You just fill out a form, check a few boxes, pick an investment such as a target-date fund, and you immediately start saving for retirement (sometimes with an employer match to boot!). Simple, right? While it may be easy to sign up for a retirement plan through your employer, some planning tips could make your 401(k) work harder for you. Let’s go over some of the basics so you can get the most out of your retirement fund.
Investment Choices
Picking your investments in your 401(k) should be a thoughtful process. While target-date funds are quite popular, they may be duplicating your efforts.
If you decide to split your allocations between a target date fund and an index fund, for example, you may double your allocation and not know it. You may leave yourself open to overweights in certain industries and sectors and have a completely skewed mix of assets.
Do some research or have your financial advisor aggregate all the underlying holdings in your 401(k) plans and see where you stand. The results may surprise you.
Roth 401(k)s
While Roth IRAs put income limits on who can contribute, Roth 401(k)s do not have this limit. The question is do you want to pay taxes now or in the future? If you expect to be in a lower tax bracket at retirement (which isn’t always the case), then the regular 401(k) is the option for you. It’s hard to predict the future, but all your pensions, 401(k)s, and IRAs could add up and put you in a higher tax bracket. And think about your spouse; if you should pass away, they would have to file as a single person, increasing their tax burden.
If you are just starting out, then presumably you are already in a lower tax bracket, so it may be appropriate for you to contribute to a Roth 401(k)—if your employer offers one.
Contribution Limits
It’s important to know your limits. In 2021, you can contribute as much as $19,500 and an additional $6,500 for those over 50. The total limit for employee and employer contributions is $58,000. (1)
Valued Advice From A Trusted Advisor
There are many factors to consider when signing up for your company’s 401(k) plan. And as with any important financial decision, it’s wise to first consult with an experienced professional. We at Treasure State Retirement Planning are here to review your options and help you make the most of your 401(k). Schedule an appointment today using my online calendar.
About Eric
Eric Rolshoven is founder and senior financial advisor at Treasure State Retirement Planning, an independent investment management firm in Florence, Montana. With over 30 years of experience in the financial industry, Eric focuses on providing his pre-retiree clients with customized insurance and financial strategies to protect and grow their assets, achieve financial security, and retire worry-free. Eric is known for explaining advanced financial concepts in an easy-to-understand manner and sees part of his job as helping to bridge any knowledge gaps for pre-retirees and retirees. Eric specializes in helping people maximize their Social Security benefits and holds frequent seminars and workshops in order to help his community be better informed about their financial options. Eric holds a Master of Business Administration with an emphasis in Finance from the University of Montana. When he’s not working, you can find Eric spending time with his wife, Julie, and their two grown children. Eric is a veteran Scout leader and baseball coach and enjoys hunting, fishing, hiking, golfing, and traveling. To learn more about Eric, connect with him on LinkedIn.
Disclaimer/Legal
This information does not constitute an offer to buy or sell any investment product, and does not constitute investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances. Because investor situations and objective vary, this is not intended to indicate suitability for any particular investor.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
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