Maximize Your Retirement Savings with a 401(k)

Investing in a 401(k) is one of the most effective ways to secure your financial future. At O1ne Mortgage, we understand the importance of planning for retirement, and we’re here to help you navigate the complexities of 401(k) plans. Call us at 213-732-3074 for any mortgage service needs and let us assist you in achieving your financial goals.

How Does a 401(k) Work?

A 401(k) is a retirement savings plan offered by many employers. Contributions are made directly from your paycheck before taxes, allowing your investments to grow tax-deferred. You only pay taxes when you withdraw funds in retirement, potentially at a lower tax rate.

To start, enroll in your employer’s 401(k) plan and set up automatic contributions. You’ll choose from a variety of investment options, such as mutual funds and exchange-traded funds, based on your risk tolerance and financial goals.

Types of 401(k)s

There are several types of 401(k) plans, each with unique benefits:

• Traditional 401(k): Funded with pretax dollars, reducing your taxable income now. Taxes are paid upon withdrawal in retirement.
• Roth 401(k): Funded with after-tax dollars. Withdrawals in retirement are tax-free, which can be advantageous if you expect to be in a higher tax bracket.
• SIMPLE 401(k): Designed for small businesses with fewer than 100 employees.
• Solo 401(k): Ideal for self-employed individuals with no other employees.

Why Should You Invest in a 401(k)?

Investing in a 401(k) offers several advantages:

• Tax Benefits: Contributions lower your taxable income now, and if you’re in a lower tax bracket in retirement, your overall tax liability is reduced.
• Automatic Savings: Contributions are automatically deducted from your paycheck, making it easier to save consistently.
• Employer Match: Many employers match a portion of your contributions, providing free money toward your retirement savings.

401(k) Contribution Limits

For the 2023 tax year, the IRS limits annual employee contributions to $22,500. Workers aged 50 and older can make an additional $7,500 in catch-up contributions, for a total limit of $30,000. Employer matching contributions do not count toward this limit, but the combined total from both you and your employer cannot exceed $66,000 (or $73,500 for those 50-plus) or 100% of your compensation, whichever is less.

How Much Should I Contribute to a 401(k)?

It’s wise to contribute at least enough to take full advantage of any employer match. Beyond that, aim to contribute as much as you can while balancing other financial needs. Many experts recommend contributing 10% to 15% of your paycheck each month.

How to Withdraw Funds From a 401(k)

There are two types of withdrawals: qualified distributions in retirement and early withdrawals.

Qualified Withdrawals in Retirement

To avoid penalties, wait until at least age 59½ to begin withdrawals. Once you reach age 72, you must start taking required minimum distributions (RMDs) to avoid penalties. Contact your plan administrator to initiate withdrawals and plan for taxes, as withdrawals are subject to ordinary income taxes.

Early 401(k) Withdrawals

Withdrawing funds before age 59½ typically incurs a 10% penalty and income taxes on the withdrawn amount. Consider this option only as a last resort. In cases of serious financial need, you may qualify for a hardship withdrawal under IRS guidelines.

The Bottom Line

Investing in a 401(k) is a powerful way to save for retirement. Take full advantage of employer matches and aim to contribute as much as you can afford. For personalized advice on retirement planning and balancing other financial goals, consider consulting a financial advisor.

At O1ne Mortgage, we’re committed to helping you achieve financial freedom. Call us at 213-732-3074 for any mortgage service needs and let us assist you in planning for a secure retirement.