As we face economic adversity, market volatility, geopolitical uncertainty, and a still-active pandemic (now in its third year), it can be hard to find a silver lining. There is at least one thing, however, that you can depend on—your 401(k).
Your Savings Are Automatic
With your 401(k), you’re following the core financial planning principle of “pay yourself first.” Money is deposited from your paycheck to your account without you even having to think about it. It doesn’t get much easier than that.
You can defer paying income tax on up to $20,500 that you save in a 401(k) plan in 2022. A worker in the 24 percent tax bracket who saves this amount could reduce their tax bill by $4,920. Income tax won’t be due on this money until it is withdrawn from the account. Workers who earn less than $34,000 in 2022 ($68,000 for couples) might also qualify for the saver’s credit, which is worth 10–50 percent of 401(k) contributions, up to $2,000 for individuals and $4,000 for couples. The biggest saver’s credits go to workers with the lowest incomes.
Savings on Top of Savings
Employees who are ages 50 and older are eligible to make catch-up contributions to 401(k) plans. The 401(k) catch-up contribution limit is $6,500 in 2022. That means older workers can defer paying income tax on up to $27,000 in a 401(k) account. As a result, someone in the 24 percent tax bracket could potentially reduce their current tax bill by $6,480.
Free Money Courtesy of the Employer Match
If you can’t max out your 401(k), you can always save at least enough to get a full 401(k) employer match (subject to your plan’s vesting rules). A 401(k) match of 50 cents for each dollar you save in the 401(k) plan, up to 6 percent of pay, is a 50 percent return on your investment. A dollar-for-dollar 401(k) match doubles the money you’re contributing. That’s a pretty good deal, even with current market volatility.
Your Money Goes Where You Go
If you leave your employer, you can take your vested balance (including the employer match) with you. It’s fully portable, and your options include rolling it into an IRA or a new employer’s 401(k) plan (if allowed), leaving it with your former employer, or cashing it out.
Account Management Made Easy
Your recordkeeper provides you with comprehensive account access where you can view your balance, perform transactions, and talk to a call center representative for guidance. On top of that, you can view retirement planning education materials and calculators, and likely even model various saving scenarios and assumptions to gauge your progress toward retirement readiness.
If you have questions about your 401(k) account and the best ways to take advantage of all of its benefits, please reach out to out team!