By Mike Gibbons, RICP®
401(k)s are great. You 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 too! What could be better? 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.
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’s a lot to think about when signing up for your company’s 401(k) plan. Our team at Gibbons Financial Group is here to take a look at your options and guide you to making the most of your 401(k). Call 224-419-5550 or email me at Mike@gibbonsfinancialgroup.com to schedule a complimentary consultation.
About Mike
Michael J. Gibbons is founder and president of Gibbons Financial Group, an independent advisory firm providing custom-tailored financial planning and investment management services to pharmaceutical and healthcare professionals and their families. Mike has over 25 years of experience and spends a significant portion of his day working with pre-retirees and retirees, focusing on asset management, Social Security and pension planning, as well as retirement income preparation.
Mike has degrees in both business and psychology from Lake Forest College and currently holds his Retirement Income Certified Professional (RICP®) designation from the American College. Mike was named a Five Star Wealth Manager for 2016 and 2018* Mike is heavily involved in his community, having served on the Village of Gurnee Police Pension Board as a Community Volunteer and the St. Patrick’s Parish Financial Board. When he’s not working or volunteering, Mike loves playing golf and spending his time with his wife and children. To learn more about Mike and how he can help you, connect with him on LinkedIn, visit his website.
*Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2016/2018 Five Star Wealth Managers.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This material was created for educational and information purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this education material.
Contributions to a traditional 401(k) may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
A Roth 401(k) offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings 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. Limitations and restrictions may apply.
An investment in a target date fund is not guaranteed at any time, including on or after the target date, the approximate date when an investor in the fund would retire and leave the workforce. Target date funds gradually shift their emphasis from more aggressive investments to more conservative ones based on the target date.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
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