Retirement planning has evolved dramatically since the introduction of the 401(k) in 1978. Today, these plans are the cornerstone of retirement savings for millions of Americans, offering flexibility and control—but also placing the responsibility for investment decisions and risk squarely on your shoulders. [CMC6078_1025]
What Makes a 401(k) Special?
- Tax Advantages: You can defer part of your salary into a 401(k), reducing your taxable income now and letting your savings grow tax-deferred until retirement.
- Employer Contributions: Many employers offer matching, profit-sharing, or safe harbor contributions, which can boost your retirement savings. These may follow a vesting schedule, so it pays to understand your plan’s rules.
- Investment Choices: 401(k) plans typically offer a range of investment options, but choosing the right mix can be overwhelming.
Contributions & Withdrawals: Know the Rules
- Pre-tax vs. Roth: Decide whether to contribute pre-tax (pay taxes later) or Roth (pay taxes now, withdraw tax-free in retirement).
- Catch-Up Contributions: If you’re 50 or older, you can contribute extra each year. Starting in 2025, those aged 60–63 can contribute even more.
Early Withdrawals: Taking money out before age 59½ usually means a 10% penalty—unless you qualify for exceptions like the “Rule of 55” or certain hardships.
Rollovers & Special Strategies
- Changing Jobs or Retiring? A plan participant leaving an employer typically has four options (and may engage in a combination of these options), each choice offering advantages and disadvantages.
• 1. Leave the money in former employer’s plan, if permitted; • 2. Roll over the assets to new employer’s plan, if one is available and rollovers are permitted; • 3. Roll over to an IRA; or • 4. Cash out the account value. - Matching Funds to the Right IRA: Pre-tax 401(k) funds go to a traditional IRA; Roth 401(k) funds go to a Roth IRA. Splitting after-tax contributions can optimize your tax benefits.
- Rule of 55: If you leave your job at age 55 or older, you may be able to withdraw from your 401(k) penalty-free.
- Net Unrealized Appreciation (NUA): Special tax treatment for employer stock can save you money if handled correctly.
Why Work with a Wealth Advisor?
The rules around 401(k)s, rollovers, and retirement planning are complex. A wealth advisor can help you:
- Customize Your Strategy: Tailor your plan to your unique goals and circumstances.
- Maximize Benefits: Take advantage of options like guaranteed income, downside protection, and charitable giving strategies.
- Stay Compliant: Ensure you meet all legal and fiduciary requirements.
- Optimize Tax Outcomes: Make smart decisions about rollovers and distributions.
The Bottom Line
Your 401(k) is likely one of your largest financial assets. With professional guidance, you can confidently navigate your options, avoid costly mistakes, and optimize your retirement outcomes. Don’t go it alone—partner with a professional to make the most of your retirement journey
Contributions to a Roth IRA are taxed in the contribution year. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.