Most Americans Are Confused About 401k Retirement Plans | Senior Finance Advisor (2024)

INVESTMENT MANAGEMENT

March 15, 2019

CATEGORY

March 15, 2019

Experts say that not taking full advantage of a 401k is one of the biggest mistakes people make when planning for retirement. Learn why understanding how to take advantage of a 401k retirement plan can save you thousands.

A recent study revealed that most Americans cannot even define a 401k. The study, conducted by ValuePenguin, an organization dedicated to helping consumers make wise financial decisions, revealed that 63 percent of Americans do not understand how a 401k plan really works. The study asked 2,000 Americans to define key money terms like credit score, compound interest and 401k. Only 37 percent of respondents said they could.

Time and education are two major issues when it comes to Americans doing their research and due-diligence for retirement planning. When it comes to 401k planning, it’s important to understand particulars to make money and retirement planning work for you to save you the biggest nest egg possible. Learn more about how a 401k works and how you can be sure you are taking full advantage of its benefits for successful retirement planning.

Understanding a 401(k)

401ks are an important retirement tool that can help taxpayers make a large impact in retirement savings, especially given that pensions are on decline and Social Security can not be relied on as a major source of income in retirement. A 401k is an employer sponsored retirement plan that allows qualified employees to put a percentage of each paycheck aside for long-term savings and investing. 401ks have several tax advantages and will grow and compound over time until the employee can start withdrawing at age 59½. Withdraws taken before then are typically penalized.

A 401k offers significant tax advantages because contributions are made pre-tax. The more funds an employee contributes, the more their taxable income is reduced. Additionally, many companies offer a matching plan so that they will match whatever percentage the employee contributes. Additionally, the money is deposited directly into the 401k fund. Because contributions are made directly from a paycheck, there is less of a temptation for the employee to choose to not invest funds.

401k Contribution Limits

The contribution limits for 401ks are much higher than the limits on individual retirement accounts IRAs. For 2019, the contribution limit is $19,000 for taxpayers under the age of 50 and $25,000 for people who are 50 or older.

In many cases, employers will match contributions from qualified employees. Employer contributions do not count towards contribution limits. Experts recommend contributing at least enough so that any matching program will take effect.

Alternative Retirement Savings

If a 401k matching plan is not offered by your employer, or you want more flexibility with your investments, there are other retirement savings accounts such as a Roth IRA, traditional IRA, SEP IRA, and health savings accounts, as well as a normal investment account.

Many of these plans do not offer as many tax benefits as a 401k or IRA but they are more flexible and can be good options for those thinking about retiring early.

To make the most of your savings and investments, contact a fiduciary financial advisor who can help you conduct a financial assessment and help you understand your retirement planning options.

Learn how to find a fiduciary financial advisor that is right for you to get your retirement planning and investments

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