Set Retirement Goals

Before we get to how you should manage your retirement accounts, you must determine what you want or expect out of them. How much money will you need or want in retirement? If you’re 25, it can be a little harder to answer these questions, since almost everything will be variable at this point. Older folks will want to consider such questions as:

• How much income do my spouse and I earn now, and how much do we want to save for retirement? If you are divorced, this life change could impact your retirement in a number of ways. First, if you were married long enough, you may collect more Social Security in retirement based on your spouse’s work history, or you may get less, if your spouse is entitled to some of yours. The same applies to any existing retirement accounts — you may get more or less, depending on whose account it is and the length of your marriage.
• How much money do you need to live happily (or comfortably) in retirement? To determine this number, make a guess as to how much your monthly expenses will be, then add on a figure for how much you expect to spend on extras such as travel. (Warning: This number may be different from what your spouse had in mind.)
• What types of hurdles might you need to clear to reach your goal? This could include known situations such as medical conditions, expected expenses such as tuition or a wedding, or unexpected hits such as a job loss or even the death of a spouse.

Once you have a prize to keep your eye on, you can start saving toward it with purpose.

Prioritizing IRA Contributions in Your Budget

We can’t stress this too highly: Do not wait until “later” to begin saving for retirement. The biggest drawback of waiting is that your retirement savings grows exponentially over time. It’s not like saving $5,000 a year for 10 years and getting $50,000. It’s like saving $5,000 at 8% interest for $5,400 the first year, $5,832 the next year and so on until you get $67,432 in year 10. The later you start, the harder it is to catch up.

When you’re young, retirement seems far off, so you may be tempted to take your $5K and go to Disney World or buy some really sick electronics because the reward would be immediate. But imagine yourself in retirement, only able to eat pizza Mondays through Thursdays when you can use the coupon. It’s a sobering thought.

Regardless of your age, you may fully understand the value of saving for retirement, but at the same time believe you cannot afford it. You may be in significant debt, whether it’s due to college loans, medical bills or some other reason. And while it’s important to pay down debt as quickly as possible, most financial experts advise against putting all your money toward your debt and none into your retirement savings. One reason is the one outlined above — your nest egg will grow bigger over a longer period of time — but also because it can take you decades to pay down your debt, and by the time you’re done, it may be too late to start saving for retirement.

Many companies that sponsor a retirement plan like an IRA automatically take 3% of your income out of your paycheck to deposit into your account. You may opt out, but most employees won’t go to the trouble. This favor is not borne of 100% altruism — companies benefit from higher levels of employee participation. But so do the employees.

If you think you can’t afford to contribute much to your IRA, go over your personal budget and look for areas to cut in order to free up more money for retirement. You’ll thank yourself later.

Understand IRA Contribution Limits

Now that we’ve hammered the point home about contributing as much as you can to your retirement account, we’re going to tell you that there’s a limit. The contribution limit for a 401(k) is much higher than an IRA, which is why an employer-sponsored 401(k) is so much more desirable. But an IRA is nothing to sneeze at!

For 2024, the contribution limit for an IRA is $7,000 if you’re under 50, $8,000 if you’re not. Next year, in 2025, the limits will go up again, and it’s useful to keep them in mind. These amounts often seem more affordable, and if your company offers an employer match, it will be even easier for you to contribute the maximum toward your IRA.

Traditional IRA vs. Roth IRA

If your company lets you choose between a traditional and Roth IRA, you’re going to want to understand the difference between the two. Essentially, a Roth IRA is money you contribute after taxes, and contributions to a traditional IRA are taken out before taxes. So, with a traditional IRA, when you retire and begin to draw on your account, taxes are taken out of each payment. With the Roth, you’ve already paid your taxes, so withdrawals are tax-free.

It may sound like six of one, half-dozen of the other, and it could be, but prevailing wisdom says to go with the Roth if you are younger, because you likely will be in a higher tax bracket by the time you retire, and if you pay your taxes now, when you’re in a lower tax bracket, you could save money.

Final Tips on Maximizing Returns on Your IRA

If you have the time and the interest, you may want to educate yourself further on subjects such as risk and return on investments, diversification for advanced growth, rebalancing your portfolio and how life changes can impact your accounts. If studying these subjects isn’t your idea of after-hours fun, you may want to consider discussing your retirement goals with a financial advisor. Regardless of which of these options you choose — or if you choose neither — the bottom line is that starting early and making regular contributions is the best way to a comfortable retirement.

The post Strategies to Supercharge Your IRA & Maximize Returns appeared first on Fast and Affordable 401k for growing businesses.

1. Calm Down

If you’re scared of investing, understand that this is quite common, but also unnecessary. It’s true that you don’t want to jump into investing without any preparation. But what happens too often is that potential investors become overwhelmed when they consider the enormity of learning about investment strategies, and this paralyzes them and prevents them from moving forward. We would almost be so bold as to suggest that such a scenario is worse than making decisions blindly.

Rest assured that if there was one specific way to invest correctly, everyone would have done it by now and they would be rich. But only some people are rich, and their investments are often not why.

Trust yourself. Start small and vow to make slow and steady progress. Once you begin to understand more and see the fruits of your labors, you will gain the confidence you need to continue.

2. Use Proven Models

A 401(k) is considered superior to an IRA because it allows you to save so much more money. The employee contribution limit for a 401(k) in 2024 is $23,000. The limit for an IRA is $7,000. The downside is that a 401(k) often doesn’t allow you many choices. Sometimes your choices are limited to what percentage of your contributions you want to allocate to the three main areas of investments — stocks, bonds and cash investments.

Many timid investors find this not a drawback, but a plus — no big decisions to make! And we get it. It works for some people. If this is how your company’s 401(k) works, just know that you have the option of opening your own IRA that will allow you more flexibility in choosing what you want to invest in. Take some time to read up on not just stocks that perform well, but might also tie into your interests, such as sustainable agriculture, technology or business.

Regardless of how much choice you are allowed with your retirement portfolio, it’s easy to find pie charts and standard recommendations on what percentage of your contributions you want to allocate to specific types of investments based on your age and risk tolerance.

For instance, experts recommend that younger investors allocate more of their contributions to stocks than older investors. As time goes on, you may want to put more money into a bond ladder, which provides income over time as each bond reaches maturity. Experts further recommend that as you approach retirement, you keep enough cash on hand to cover a year’s worth of expenses, and two to four years’ worth of expenses in short-term accounts. That’s because you want your money to still work for you, but you want to be able to access enough in the event of a downturn. Most downturns don’t last beyond four years, hence the recommendation.

3. Make a Roadmap for Retirement

If you’re in your 20s or 30s, retirement may seem like it is still far off. And by some yardsticks of measurement, it is. But hopefully you have seen some charts showing how important it is to start investing early, even if you don’t have as much to invest. In the early stages of investment, it may be difficult to tell how much you will need to save for your retirement. There are mathematical models, to be sure, that give you some numbers based mainly on your age, but also on a few other factors. They are hardly individual, however. Some factors to consider when you’re planning for your retirement include:

• How much will you collect in Social Security? This number can be affected by not only a change in income, but also a change in marital status or the age at which you choose to retire.
• Do you have a pension? Most workplaces don’t provide pensions anymore, but if you’re in a government career such as teaching or public safety, you may still get a pension.
• Will you work in retirement? Many people imagine they will travel extensively or just relax in retirement, but both of these can get boring. A place to go every day and a little money in your pocket during retirement can make a difference.
• Do you expect to share expenses with a partner? Most often this is a spouse, but it can be a family member or another person who splits living expenses with you.

4. Approach Investing as if It’s Fun (It Is!)

You may see the value of your investments rise and fall over the years, and world events can affect this, including war, famine, weather, global pandemics and more. But investing isn’t like poker or a horse race, so there is no need to panic at the thought of losing a lot of money. As long as you diversify (don’t put all your eggs in one basket!), you should be fine. It’s satisfying — at any age — to watch your money grow and to know that you’re doing important work to take care of yourself and your family in your golden years.

The post How to Build a Retirement Portfolio appeared first on Fast and Affordable 401k for growing businesses.

Compound Interest and You

Compound interest can be your friend and your foe. If you have yet to begin saving seriously for retirement, you may be more familiar with compound interest in its more terrifying form — the extra money you pay to banks every month for the privilege of having a house or car (or credit card debt).

With compound interest, if you owe $1,000, the amount of interest charged each month is added to that $1,000, so soon you are paying interest on $1,050, then $1,100 and so on, and this is why it can take five years to pay off a $1,000 charge on a credit card at 20% interest if you make only the minimum payments.

Interest rates for borrowing money — which are often tied to credit scores and bank accounts — can be the source of serious financial hardship, as well as prevent you from saving more toward your retirement. After all, if you can’t pay for what you need now, how are you going to save for later?

Financial guru and Washington Post columnist Michelle Singletary loves to repeat the often-used and well-loved adage: Pay yourself first. This means, make saving a priority. If you owe thousands of dollars that you’re paying interest on, it may seem counterintuitive not to put every available dollar toward paying it down, but it’s not, and here’s why.

Some purchases, such as a car, can take years to pay off. Others, like a house, can take decades. If you wait until you pay those off before you start saving for retirement, your retirement will look very different. This is the mistake that people in their 20s, and even their 30s, can make — thinking that saving for retirement is something they don’t have to worry about yet.

How Compound Interest Works

If you borrow $400,000 to buy a house at 8% interest over 30 years, you will pay more than $656,000 in interest — more than 50% more than the purchase price of your house at a total cost of over $1 million. If you’re lucky, you can get the same rate of return on your retirement account. According to Time Magazine, a 401(k) can earn you, on average, 5%-8% per year, while SmartAsset says you can expect 7%-10% per year from your IRA.

Now, the kicker here is that if you get a mortgage like the one we just mentioned, you will pay about $3K a month toward it. You likely will not put that much into your retirement account if you are just starting out. But the point we are making here is not that you can get ahead of your mortgage interest rate with hefty contributions to your retirement account, it’s that interest builds quickly.

If at age 25 you start putting $200 a month into your IRA at 8% interest for 40 years, you will end up with about $644,000. If you start when you’re 35, you get $282,000. The reduction in time you’re saving money is 25 percent, but the reduction in income is nearly two-thirds. If you start when you’re 45, you end up with a dismal $113,000.

And remember, interest rates fluctuate. That’s why homeowners refinance. Just a few years ago, mortgage interest rates were below 3%. Now they’re above 8%. This is why investors sometimes panic when interest rates drop, or one of their investments tanks and they see that number on the bottom line shrink precipitously. Time tells us that if we just wait it out, the money will return. But if you are set to retire in the middle of one of these tough periods, you may not have time to wait. That’s why it’s important to diversify.

How Compound Interest Helps Your 401(k)

We’ve mentioned how investing in an IRA over an extended period of time can lead to serious gains over the long run.  This can be amplified, by taking advantage of your employer’s sponsored 401(k) plan.  Many plans will have an employer match, which goes straight into your account, if you contribute as well.  For example, a common employer match is the Safe Harbor Basic Match.  This employer contribution will match your contributions up to a certain extent.  If you contribute 5% or more of your compensation, you will receive a 4% match on top of this.  

While this may seem like a small percentage, over time, this will grow into a large amount.  For example, if $500 is contributed into your retirement account (which can be a mix of employer and employee contributions), at a 8% rate of return, over 40 years of employment, then one can expect an amount of $1,745,000 at retirement.  Not bad!

By saving early, compound interest can work in your favor.  This doesn’t need to be large amounts cashed away all at once, if money is tight.  Rather, modest cutbacks and investing that money can lead to significant growth in the long term.  By skipping a visit to that fancy restaurant, or cutting back on unused subscriptions, or leaving out your daily Iced Salted Carmel Macchiato, and investing this instead, then you could see $8 here or there turn into thousands in the long run.

Financial Advisors & Investing

If your employer offers the services of a financial advisor, it’s probably worth looking into. You can also do your own research, but when you set up your IRA, determine how much risk you are willing to take on. Prevailing wisdom says that the younger you are, the more risk you are able to assume because you have more time to earn the money back, should some be lost. This extra risk can be valuable, as it often pays higher returns. As you age, a portion of your investments should be shifted to more secure funds with lower returns.

The bottom line: Don’t wait. If your employer doesn’t offer a retirement savings plan, you can open a traditional or Roth IRA through 401GO in minutes. If you are a small-business owner, you can set up a plan for your employees with us almost as fast. The days when we could rely on Social Security, Medicare or other government programs to help pay our expenses in our old age are gone. It’s up to us now. Put your first $100 into your IRA and think about compound interest every time you make another contribution. You’ll be glad you did.

The post The Power of Compound Interest: How to Build Wealth for Retirement appeared first on Fast and Affordable 401k for growing businesses.

One of 401GO’s primary goals is making investing easier — for companies and their employees. Our automated guided portfolio builder can quickly assist users in making the types of selections they may not be comfortable making on their own.

Choice Overload

Choice overload is real, and although it has become more prevalent since the dawn of the internet, having too many choices has been an American problem for a long time. While some consumers have more trouble making decisions than others, the fact is that the more choices you have, the more difficult it can be to decide. No matter what you’re buying, you want to make the best choice for you. At 401GO, we offer many more choices than other plan administrators — well over 100.

While investing in any of the options we provide is infinitely better than putting your money in a bank account, under your mattress or into your brother-in-law’s latest startup, it’s clear that some options are better for some investors than others. How do you know which are best for you?

Ask the Portfolio Builder

When you use the 401GO portfolio builder, it automatically takes into account such factors as your age and the age at which you expect to retire. It’s critical to consider how long it will be before you will need your retirement funds — the closer you are to retirement, the less risk you want to take on.

For many workers, a 401(k) is their first foray into investing, and at 401GO, we want that to be a good experience — free of angst and regret. To accomplish this, our automated portfolio builder holds your hand through the process, asking you important questions that help us determine your capacity for risk. Next, our algorithms build a customized portfolio, based on all the relevant criteria. All you have to do is watch your money grow!

Getting Comfortable with Investing

Whether your 401GO portfolio is your first time investing or you have been investing for years, know that our guided portfolio builder is an option you have — not a requirement. You can devote as much or as little time and energy to the process as you want. For instance, you can use our guided portfolio builder and then opt not to invest in the funds it recommends. Or you can accept some, but not all, of the recommendations. Or you can build your entire portfolio on your own.

What makes the 401GO system so advantageous is that you can make changes to your portfolio whenever you wish. You are not tied to any single fund for any period of time. Thus, you may want to start investing with the guided portfolio builder, then over time, as you learn more about investing through your own research, you may opt to make changes.

The Rewards of Investing

Time was, an employee’s retirement was funded by their company’s pension plan (if their company had one) instead of a 401(k). In the best-case scenario, employees enjoyed a comfortable retirement, funded by their employer. In the worst-case scenario, the employer went bankrupt before or during the employee’s retirement, leaving them in the lurch. With the passage of the law now known as ERISA in 1974, pensions had to be insured, guaranteeing employees’ benefits. Shortly thereafter came the birth of the 401(k) plan, an alternative that was easier and cheaper for companies to manage than pensions.

While some may lament the demise of pensions which lay all risk at the feet of the employer, one big advantage of a 401(k) plan is the control it hands over to employees. Although employees take on more risk, they may see much larger returns on their investments as well. 

Regardless of whether the investments pay moderately or handsomely in retirement, the choice lies wholly with the employee, which is how many investors prefer it.

The Role of Financial Advisors

As much as we like to extol the virtues of choice when it comes to your investments, we want you to know that you are always free to use your company’s financial advisor to help you make important decisions with respect to your 401(k). We can grant access to your account to your employer’s financial advisor so they can see what your investments are and how they are doing. Your advisor may recommend you stay the course or make changes to better meet your financial goals.

Start Early for Best Results

Your employer has chosen to work with 401GO to provide you with an important benefit — the opportunity to invest in your future. A secure retirement greatly improves quality of life. We have provided our guided portfolio builder and we offer affordable investments as a way to encourage plan participation. With a greater pool of participants, more favorable outcomes are possible.

Get your recommendations from our guided portfolio builder today, and enjoy the benefits of a customized retirement plan for life.

The post Let Our Portfolio Builder Be Your Guide appeared first on Fast and Affordable 401k for growing businesses.

There are two main types: traditional 401(k)s and Roth 401(k)s. Each has its unique advantages, similarities, and differences. 

Differences Between Traditional and Roth 401(k)s

1. Timing of tax benefits 

With a traditional 401(k), you get the tax benefits up front when you make your contributions. This comes in the form of a deduction from your taxable income. Alternatively, with a Roth 401(k), you get the tax benefits later when you withdraw your money during retirement. So, no deduction up front, but you never pay taxes on the money again.

2. Tax treatment of your contributions 

A traditional 401(k) allows you to make contributions on a pre-tax basis. This means that the money you contribute to your 401(k) is not subject to income tax when you contribute. Instead, the money is taxed when you withdraw it during retirement. So, for example, if you earn $60,000 annually and contribute $6,000 to your traditional 401(k), you’ll only pay income taxes on $54,000.

With a Roth 401(k), you make contributions with after-tax dollars. This means you pay taxes on the money you contribute up front, but you can withdraw your contributions and any earnings tax-free during retirement. So, for example, if you earn $60,000 annually and contribute $6,000, you still pay income taxes on the entire $60,000, but you won’t pay any taxes in retirement when you distribute the $6,000 and its earnings.

3. Employer matching contributions 

Many employers choose to offer employees a company match to incentivize saving for the future using the 401(k) plan. Both traditional and Roth contributions are eligible for employer matching. Just recently a law was passed (SECURE 2.0) that allows employees to decide whether they want employer contributions to be pre-tax or Roth. Previously matching contributions were always made pre-tax.

This is important to note if you ever choose to roll over your funds to a new employer or Individual Retirement Account (IRA) because you’ll need to keep the pre-tax and after-tax funds separate during the rollover process. 

Similarities Between Traditional and Roth 401(k)s

Despite their differences, traditional and Roth 401(k)s have many similarities.

• Employers can match contributions. An employer match is normally made pre-tax, but employees can decide if they want that to be Roth now. Employee contributions are eligible for employer matching, whether they are traditional or Roth.

• Contributions are capped. The IRS has annual contribution limits for traditional and Roth 401(k)s. The limits are the same for both and are $22,500 for 2023 or up to $30,000 for employees aged 50 and over.

• No income limits. While Roth IRAs and deductible IRA contributions can be limited by income, traditional and Roth 401(k)s have no income restrictions. This can make them a valuable account type for even the highest income earners.

• You can use both. If your employer offers a traditional and Roth 401(k) option, you can use either one or both. This can be a great way to diversify your income sources for retirement by having pre-tax and after-tax funds. However, remember that both accounts count towards the same annual contribution limit. For example, if you are under age 50 in 2023 and contribute $15,000 to your traditional 401(k), you can only contribute another $7,500 to your Roth 401(k) for a total of $22,500.

• They’re employer-sponsored. Unfortunately, if your employer doesn’t offer a traditional or Roth 401(k), you can’t open one independently.

• Investments grow tax-free. One key benefit of both account types is that your investments grow tax-free. That means as long as the investments are inside the account, growing and compounding for the future, you won’t pay any taxes on the gains, dividends, or interest along the way.  

• Penalty-free withdrawals after age 59.5. Both accounts allow for penalty-free withdrawals once you reach age 59.5. There are also penalty exceptions for death, disability, and hardship. 

Advantages of Traditional and Roth 401(k)s

Lastly, consider the advantages of each when deciding whether to contribute to a traditional or Roth 401(k).

Traditional 401(k) Advantages

The key advantage of a traditional 401(k) is that your contributions are pre-tax (deducted from your taxable income.)

This is often used by high earners who believe their tax bracket today is higher than their future tax bracket in retirement. By contributing to a traditional 401(k), high earners can get a tax deduction at a higher tax rate and then withdraw the funds at a lower tax rate during retirement. 

For example, if you are in your peak earning years, you could pay 32% or more in federal income taxes. So, if you contribute $20,000 to your traditional 401(k), you save $6,400 in federal income taxes ($20,000 X .32 = $6,400.) But, your income in retirement may be much lower, putting you in the 22% tax bracket. This means that the same $20,000 distributed in retirement would only create a tax bill of $4,400 ($20,000 X .22 = $4,400). 

Roth 401(k) Advantages

Alternatively, a Roth 401(k) is funded with after-tax dollars, but the distributions are tax-free during retirement.

This is often used by savers in a low tax bracket today who anticipate a higher tax bracket during retirement. By contributing to a Roth 401(k) in a low tax bracket, you essentially lock in your low tax rate and never pay taxes on the money again.

Ultimately, deciding which type of 401(k) to use depends on a number of factors, and there is no one-size-fits-all approach. Instead, consider speaking with a trusted financial advisor to better understand which is suitable for you and your unique situation. 

401GO Offers Roth and Traditional 401(k)s

At 401GO, we provide small business 401(k) plans powered by an easy-to-use platform. Both Roth and traditional plans are available, and most employers offer both options to their teams. Many small businesses opt to use a safe harbor 401(k) plan, which allows for both Roth and traditional contributions.

If your company is considering starting a new 401(k) plan, or transferring an existing plan to a new provider, please contact us. We would be happy to answer your questions.

The post Understanding Roth and Traditional 401(k) Contributions appeared first on Fast and Affordable 401k for growing businesses.

This makes 401(k)s a win-win for businesses of any size, allowing employers to enjoy the many advantages of offering a retirement plan while their employees can save and build a secure retirement nest egg. 

And for many employees, that’s one of their essential financial goals—saving enough money to retire on time and live their ideal lifestyle. And when it comes to setting themselves up for retirement, 401(k)s are a great option.

Here are seven benefits of a 401(k) plan for employees:

Benefit 1: It’s easier to save with payroll deductions.

401(k)s are a powerful savings tool for employees because they reduce friction in the employee’s path.

And the results are staggering. Employees are 15 times more likely to save for retirement if they have access to a payroll deduction savings plan like a 401(k). Instead of getting paid and taking an extra step to transfer funds to their investment accounts, employees save first and get paid second with payroll deductions. This method of automatic investing can make all the difference in preparing for retirement.

Benefit 2: There are unique tax advantages.

401(k) accounts benefit from a series of unique tax advantages.

At a high level, most employers offer two savings options within a 401(k)—Traditional and Roth.

First, Traditional and Roth have one powerful tax advantage in common—you don’t have to pay taxes on the funds inside your account while they’re growing and invested. This means you don’t pay tax on any dividends, interest, or capital gains within your 401(k), as long as you don’t withdraw the funds. 

Next, there are some key differences to consider.

Traditional 401(k)s, also known as “pre-tax,” allow employees to contribute money to their 401(k) before income taxes are taken out. This can be valuable as employees can contribute more to their 401(k) than they would have if taxes had been taken out. 

For example, if you pay 20% in income taxes and contribute $100 to your Traditional 401(k), that tax advantage saved you $20 in taxes, and that $20 went right into your 401(k), invested for retirement. So, the higher your tax rate, the greater the benefit of contributing money pre-tax. 

But, like most things, there’s a catch.

With pre-tax contributions, you end up paying the taxes when you withdraw the money during retirement. But, for many, this is still a good trade-off because they can stay in a lower tax bracket during retirement than they can during their high-income years while working. 

Next are Roth 401(k)s.

Roth 401(k)s are the opposite of Traditional. So you pay the taxes now, contribute the “after-tax” funds to your 401(k), but pay no income taxes on the distributions during retirement. This is a decision to pass up the tax advantages today in exchange for the tax advantages in the future. Generally, this is best for younger employees in a lower tax bracket who believe they’ll be in a higher bracket during retirement. 

Whichever way employees decide to go, there are significant tax advantages to saving in a 401(k).

Benefit 3: You can enjoy higher contribution limits.

Next, 401(k)s have much higher contribution limits than other retirement plans like IRAs.

Contribution limits adjust to inflation, so be sure to check the IRS website for the most updated figures, but employees can contribute the following to their 401(k) account:

• $22,500 in 2023 ($20,500 in 2022)

In addition, employees age 50 or older have an additional “catch-up contribution” limit of:

• $7,500 in 2023 ($6,500 in 2022)

But, limits don’t stop there, as there’s a higher annual limit which includes employer matching and nonelective employer contributions in addition to the employee deferral and catch-up. That limit is the lesser of:

• 100% of the employee’s compensation, or
• $66,000 for 2023 ($73,500 including catch-up contributions); $61,000 for 2022 ($67,500 including catch-up contributions)

This can be a powerful benefit for employees, allowing them to save significant amounts in their 401(k) each year to prepare for retirement.

Benefit 4: You might increase your compensation with matching contributions.

Another key benefit of a 401(k) is employer matching contributions.

Employers aren’t required to match contributions, but many do an added benefit for their employees. Matching schedules vary, but a typical match structure is a 100% match for the first 3%, then a 50% match for the next 3%. That means if an employee contributes 6% to their 401(k), their employer will contribute 4.5%. This takes an employee’s overall contribution to 10.5%, taking advantage of powerful matching contributions to increase their savings.

Benefit 5: Compound interest provides a powerful force for saving.

Compound interest is said to be one of the most powerful financial forces.

And fortunately, employees can benefit from the power of compounding in their 401(k) as long as they can stay invested in the market. Essentially, compounding is earning interest on your earned interest. And the longer you let compounding work, the more powerful the effects on your portfolio.

Benefit 6: Investment fees are lower and options are fewer than other investment vehicles.

Next, there are some unique investment advantages for employees.

First, employees can benefit from lower investment fees within their 401(k). That’s because many investment companies offer different share classes for their funds depending on the situation. So, as a single investor, you may only have access to the “investor share class,” which typically comes with a higher investment fee. Alternatively, with a 401(k), your employer may access the “institutional share class,” which usually comes with a lower investment fee.

And while the difference in fees may seem small, the effect will compound over time, resulting in significant cost savings for even a small fee differential.

Next, employees can benefit from fewer investment options.

This may seem like a drawback, but for many, it means better outcomes. That’s because more options don’t always mean better decisions, and often, more options result in inaction, commonly known as the paradox of choice.

Alternatively, your employer will likely offer between 8 and 12 investment options within your 401(k). And typically, the options provided will have enough diversity to build a solid retirement portfolio and grow your wealth over the long run. 

Benefit 7: Your account is portable.

Lastly, employees can take their 401(k) with them if they leave an employer—also known as “plan portability.”

In other words, employees own their 401(k) and can feel confident saving for retirement without worrying about forfeiting their funds if they leave their current employer. That said, there are a couple of things to understand:

1. First, employer matching contributions may not be yours to keep—yet. 

Depending on the specifics of your 401(k) plan, your employer matching contributions may be subject to a vesting schedule. This means you may not own the amounts your employer contributes immediately. For some, this means they have to work at their job for 1 to 3 years before they can keep their employer match. But, not all employers have a vesting schedule, so it doesn’t apply in every situation. But remember, anything you contribute to your account is always 100% yours, no matter how long you’ve been with your employer.

2. And second, if you withdraw the funds instead of “rolling them over,” you will pay taxes and an early withdrawal penalty.

One common mistake employees make when changing jobs is withdrawing their 401(k) instead of rolling it over. This results in a taxable distribution and can create a 10% early withdrawal penalty for those under 59.5. So, when leaving your employer, remember that it’s usually better to roll the funds directly from your 401(k) to your new 401(k) or other retirement plan.

Your Partner for Retirement Benefits

At 401GO, we provide small business 401(k) plans powered by an easy-to-use platform. Our streamlined approach allows you to get up and running in just minutes with simple and affordable pricing to fit your unique business.

Talk to us about the many ways a 401(k) can benefit you and your employees.

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The days of wooing new hires with ping pong and snacks are past. Some of top priorities for employees include hybrid working environments, career development, and a feeling of contributing to a worthwhile cause.

Some of this year’s top rated employers include:

• Dell, who prioritized employee development and internal hiring
• SAP, who offers month-long sabbaticals to use skills in developing communities
• Avande, who focuses on family health, and offers reimbursement for some family-related needs
• Marriott, who refers to mistakes as development opportunities
• Hilton, who offers destination workplaces and attractive performance rewards

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 “Whether to pay off the debt first or contribute to 401(k) first?”

With this question, a dilemma runs on an American’s mind: how much of your earnings will you use for debt repayment and how much money will you contribute to your 401(k) account?

There is plenty of advice that you have listened to already and are going to listen to that you can pay off your debt first and then you may think about saving in the 401(k) and to your other retirement savings plans.

Yes! This idea or advice is right. You can follow it but there is a glitch to the plan.

Your age will be the vital factor to decide whether to repay your debt first or to save for retirement first.

If you are still young, it means you have time to save for retirement. You can repay your student loan, multiple credit card debts then you can slow save for retirement. You have time as you are young.

But this plan to pay off your debt first and then save for retirement won’t work for you if you have already crossed 30. Because you don’t have that much time in your hand like the early 20s young Americans.

 So, what is the ideal way? The correct way is to pay off your debt and save for retirement; both at the same time.

Look at yourself in the next 2 or 3 years

If you are determined to repay at least your unsecured debts in the next 2 to 3 years, you may be free of debt in the next 3 years but you are going to miss the retirement savings for the next 3 years.

If you have a 401(k) account and if you are not contributing at least your company’s match to pay off your debt first, then you are going to miss the next 3 year’s retirement savings.

Maybe, in the next 3 years, you were successful in repaying a major portion of your debts but you have to start all over again with your retirement planning. 

So, to pay off your debt first and then concentrate on saving in the 401(k) along with other retirement savings is not going to work for you.

You have to create a balance between retirement savings in 401(k) and debt repayment.

What is the benefit of contributing to a 401(k) account?

The 401(k) is an employer-sponsored retirement plan. You can lessen your taxable income by accepting the 401(k) offer because your company will deduct your contribution on a pretax basis. It means the 401(k) deduction will reduce your taxable income. You have to pay less income tax as an employee after contributing to your company’s 401(k) plan.

Besides the tax benefits, many companies match a part of its employees’ 401(k) contributions. The match establishes a portion of the employees’ compensation. Most of the time, the contribution by the employer is 3% on an average of the employees’ salary but they can give up contributing to an employee’s 401(k) account if the employee does not contribute his/her portion in the 401(k).

So, in brief, for receiving the benefits of the 401(k) account, you have to contribute to the 401(k) also.  

Listen to what personal finance experts are saying

Personal finance veterans who are experiencing such types of problems for years, have chalked out a well-balanced plan for you. Thus, you can pay off your due debts and save money to your 401(k) account at the same time.

Read the 3 Points financial recommendations created for you by the financial veterans.

1. You may start with repaying your high-interest credit card debts and payday loans if you have any payday loan. While making payment to your high-interest credit card debts and trying for a payday loan settlement, you may try to match at least your company’s contribution to 401(k). Thus, you can maintain a monetary contribution to 401(k) as well as paying off your high-interest credit card debts and payday debts.

2. When you’ll make the complete payment of your high-interest credit card debts, concentrate on your relatively low-interest credit card debts or the other debts you have. You may pay more than the minimum amount to your low-interest debts. Along with it, you must continue contributing to your 401(k) account.

You can start an Emergency Fund bank account if you think you may again be compelled to take out high-interest debts. The emergency fund will save you from taking out high-interest debts. So, the dilemma of paying off your debt first or continuing to contribute in 401(k) first, will never emerge in your mind. 

3. When you will be able to repay a major portion of your low-interest debts, then pay your full attention to increase your retirement savings that include the 401(k).

If you adopt this plan of 3 Simple points, your debt payment will be over and you can maintain your contribution to the 401(k) and other retirement savings accounts.

You can take the expert’s help also to get a permanent solution to your dilemma

If the article is not able to solve your confusion then there will be no harm if you accept the expert’s advice to get a permanent solution to your dilemma.

According to David Blanchett, Head of CFP, CPA, Retirement of Morningstar, 40% of Americans who have accepted the expert’s advice, get a perfect and correct solution to their paying off debt versus contribution to 401(k) first problem.

The survey says the Americans who have not consulted any professionals, are still struggling with both paying off debt and contributing to the 401(k) problem.  

Your consulting expert can help you to create a plan to get out of your debts, making appropriate contributions to your 401(k) account, and how to maximize your other retirement savings.

So, you can ask a financial expert if you have any dilemma regarding how to find a permanent solution to your financial problem.

Final Words 

Overall, you need to maintain a balance between your debt payment and contributing to the 401(k). For example, you need to pay off your high-interest credit card debts and the payday loans first but there is no need to show any hurry to repay your mortgage loan as it has a low-interest rate. So, the better idea is to take care of your debt payment as well as concentrate on your future savings also.

Author Bio: Catherine Burke is a financial writer for online payday loan consolidation. She provides information on successful cash loans and payday loan consolidation to help people get over a difficult patch. She lives in Kansas and has earned a frame in the matter of payday loans. 

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