What is a 401(k)
A 401(k) is a retirement savings plan sponsored by an employer. The plan allows you to set aside money from your paycheck into a 401(k) account and invest it. The idea is that your money will hopefully grow inside the 401(k) over the years you are working and then you will have money to retire on. What is nice about a 401(k) is you do not have to pay any federal tax on the money put into the 401(k) until you withdraw it. When you take the money out the tax rate at that time is the rate that applies to your withdrawal amount. Your employer handles setting aside this money by automatically taking it out of your paycheck.
How much can you contribute to your 401(k)
There are a lot of factors in what you can contribute to a 401(k). A common question we get is how much an individual can contribute to a 401(K). Contributions can be increased or decreased anytime you want, even after you have chosen an amount. In 2019 the limits were raised so an individual under the age of 50 can put in up to $19,000 a year and if you are over 50 years old you can put in up to $25,000 a year in a 401(k).
What to do with your 401(k) if you are no longer employed with that employer?
When leaving your current job, you have some options when it comes to your 401(k).
- 1.) You can leave your money where it is. Sometimes this is not an option it depends on the 401(k). This usually isn’t the best option as you are no longer with this employer and it might be hard to keep track of how the performance on your 401(k) is doing.
- 2.) You can move your 401(k) into your new company’s plan. Sometimes this isn’t an option either depending on the 401(k).
- 3.) You can cash out the 401(k). If you are not 59 ½ you will be penalized 10% to withdraw early.
- 4.) You can roll over your 401(K) into a traditional IRA or ROTH IRA. This is very simple to do. You can speak with your financial advisor and pick the best funds that fit best for your specific goals. You can also contribute to your IRA or ROTH IRA. For 2019 If you are under 50 years old, you can invest $6,000 a year and if you are over 50 years old you can invest up to $7,000 a year.
If you have any questions about your current or old 401(k) please feel free to contact us. We offer free, no obligation consultations.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Contributions to a traditional IRA 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% penalty tax in addition to current income tax.
The ROTH IRA offers tax deferral on any earning in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations are 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.