Whether you already have a 401(k) plan or you are in the process of starting one, it’s an important investment to make for a confident financial future. The current environment of investing is going to continue to change, especially considering the state of rising inflation and increasing interest rates as a result. With this in mind, everyone should be conscientious about how to start a 401(k) as well as maintain it to meet their financial goals. Here are a few tips for heading down the right path.
Select and Create an Account
Sign up for an account or start one with your employer. If you are offered a 401(k) benefit through your employer, you most certainly should take advantage of that option, especially because most companies will match your contribution to a certain maximum percentage. If this is the case, you should always match the same percentage of your income if you have the funds to do so.
Companies are not allowed to give investment advice or help you make decisions about your account, but the company will likely have an outside financial firm that will handle administrative details. You will have several investment choices and different fees to consider, so this can also be a great time to think about working with a financial advisor. If an employer account is not available to you or you are self-employed, you are also able to set up a solo 401(k) plan.
Consider Your Excess Cash
If you have excess cash available, individuals can put up to $20,500 in addition to their match percentage in their 401(k) account. Additionally, people who are 50 or older can contribute a catch-up amount of $6,500 to equal a total of $27,000 per year.
Understand Your Tax Deductions
The contributions you make to your 401(k) plan can reduce what you owe in taxes at the end of the year because they are removed from your taxable income (made on a pre-tax basis). As an important note, this is not to be confused with the income tax you will have to pay to withdraw money from your plan in retirement, but that tax rate is typically lower.
The higher your income is, the more you will save by contributing to your plan — your deduction is calculated by multiplying your yearly contribution amount by your marginal tax rate.
Decide How You Want to Invest
It is always a good idea to have some diversification in your investment portfolio. 401(k) plans usually offer a mix between stocks and bonds. Many experts recommend using the 80/20 rule when making investment choices — stocks are typically more lucrative but can be unpredictable whereas bonds have a lower return rate but are more stable.
The sooner you can start saving for retirement, the better. Starting contributions at 22 versus 30 years old could mean roughly a 30% difference in how much you can save, which is significant. Additionally, you don’t necessarily need to wait to start saving even if you have debt. If you budget wisely, you might find it’s not difficult to pay off past debts while saving for the future simultaneously.
Ready to get started setting up a confident financial future? At Republic Bank, our team of experts can help. Give us a call at 800-526-9127 today!