Understanding 401(k) Plans: Your Path to Retirement

A 401(k) is a tool for helping to build a secure financial future, providing tax benefits, employer contributions, and the opportunity for investment growth. Understanding the basics can help you make informed decisions.

What is a 401(k)?

A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a portion of their paycheck before taxes are deducted. Taxes are not paid until the money is withdrawn from the account, typically in retirement.

Types of 401(k) Plans

• Traditional 401(k): Contributions are made pre-tax, and withdrawals are taxed as income.
• Roth 401(k): Contributions are made after-tax, but withdrawals in retirement are tax-free.

How does a 401(k) work?

• Contributions: Employees can choose to contribute a portion of their salary to their 401(k) account. This amount is deducted from their paycheck and deposited directly into the 401(k).
• Employer Match: Many employers offer to match a portion of the employee’s contribution. This additional contribution can help boost retirement savings.

Contribution Limits

The IRS sets annual contribution limits for 401(k) plans. For 2024, employees can contribute up to $23,000 to their 401(k). Those ages 50 and over can make additional catch-up contributions, allowing for an extra $7,500 per year.

Withdrawal Rules

• Early Withdrawals: Generally, avoid early withdrawals to prevent penalties and taxes. Withdrawals before age 591/2may incur a 10% penalty and are subject to income tax.
• Required Minimum Distributions (RMDs): You are required to take distributions from your 401(k). The required minimum distribution (RMD) age was increased to 73 beginning in 2023 for individuals who turn 72 after 2022.

Changing Jobs: What to Do with Your 401(k)

When changing jobs, you have options for your existing 401(k):

1. Keep your funds with your previous employer: If allowed, you can leave your 401(k) with your previous employer. This may be beneficial if the plan has good investment options and low fees.
2. Transfer your 401(k) to your new employer’s plan: This can consolidate your retirement savings. Ensure you follow the direct rollover process to avoid taxes and penalties.
3. Roll over your 401(k) into an IRA: Rolling over your old plan to an individual retirement account can help provide a range of investment options and fee structure. To view more information for options for your 401(k) when changing jobs, read more here.

StackStone Wealth can help with your 401(k)

It is helpful to regularly review your 401(k) to be sure it aligns with your retirement goals and to adjust your investment choices as needed. Rebalancing your portfolio as needed can help maintain the desired risk level and help optimize growth. Reach out to our financial planning team with offices spanning from Dubuque, IA, Rockford, IL, Marquette, MI, and Lake Geneva, WI. We are here to help.