Think you know your 401(k)? Here are 5 game-changing facts for a better retirement

You’ve probably been putting aside a chunk of each paycheck to feed into your 401(k) – but how much do you understand about this important piece of your financial future?

Your 401(k) isn’t just a retirement account; it’s the foundation of long-term security, a tool to grow your nest egg and the opportunity to take full control of your golden years. However, beneath this important tool in your financial tool belt lies a world of opportunities, rules and strategies that can have a profound impact on your future.

Here are five important tidbits of information to help you manage your 401(k) and build your retirement savings with confidence.

1. Balances Given

You might be surprised to learn that every balance that shows up in your 401(k) account may not be the one you want — at least, not yet.

Many employers have vesting schedules, which determine how long you will need to stay with the company to fully claim their benefits. These schedules mean the difference between traveling and a part-time or full-time employer. For example, if your company’s contributions are fully vested in three years of service, leaving for another job without reaching that limit may mean you are entitled to only a portion – or even one – of its contributions.

Let’s say your 401(k) account shows a balance of $30,000, with $20,000 coming from your personal contributions and $10,000 from your employer’s match. If you were only given 50% for your performance, you’ll walk away with only $25,000 – your $20,000 contribution and your employer’s 50% match.

Knowing your purchase plan can help you make informed decisions about staying with your employer or moving on to other opportunities.

2. Roth 401(k) vs. Traditional 401(k)

401ks can come in two forms – Roth and traditional. Choosing which one best suits your needs is important to maximizing your retirement opportunities. (iStock / Stock)

Not all 401(k) plans are created equal, and choosing between a Roth 401(k) and a traditional 401(k) can have a big impact on your financial future. Understanding the difference is key to maximizing your retirement savings and making smart tax decisions.

With a Roth 401(k), you contribute with after-tax dollars, which means that taxes on the money deposited into the account are paid up front. What is the reward? When you withdraw funds during retirement, they are completely tax-free. It’s a great option if you want to get rid of your tax problems and get a better feel for how much money you might be able to make once you get rid of your time card.

Roth 401(k)s have downsides too, however. You may feel a financial pinch soon after changing your 401(k) choice and find that your income is less than before. Roth contributions also don’t provide an immediate reduction in your taxable income, meaning you may be missing out on an important tax break right now.

A traditional 401(k) option, on the other hand, may provide an immediate tax break, but at a cost of withdrawals. Deciding between the two depends on your current tax situation and your retirement expectations.

3. Small Funds Are Strong Funds

Putting aside 1% of your retirement income can make a big difference down the road. (iStock / Stock)

It’s easy to feel like small contributions to your 401(k) won’t make a big difference, but the truth is, even seemingly small changes can have a big impact in the long run.

“Employees often don’t realize how much of an impact investing 1% or more or starting a year too early can have on their retirement savings at retirement,” Michael Shamrell, vice president of Third Leadership for Fidelity Workplace, told Fox News Digital. .

This is the magic of compounding interest – the phenomenon where your savings generate income and that income, in the end, generates more income. Increasing your contributions by just 1% of your income can add up to thousands in your nest egg over time, putting you in a better position for retirement instead of saving that 1% of your income to enjoy now.

Starting early has the same big impact. While it’s never too late to decide to secure your financial future, planning for retirement starting at age 25 will give you more leverage than someone whose retirement savings started ten years later.

The takeaway? Time is your most valuable asset. Starting early, contributing consistently and understanding the big impacts of small changes are all keys to securing your future.

4. Employer Matching: Don’t Miss Free Money

Taking advantage of your employer’s 401k match is an easy way to get “free money” for retirement. (iStock / Stock)

Free money sounds good, right?

Your 401(k) isn’t just a savings vehicle — it’s also an opportunity for your employer to invest in your future. You probably know that many employers offer the same offer, which is free money for your retirement. What is a “game,” exactly? This happens when employers contribute to your 401k based on how much you choose to contribute.

For example, your employer may match 100% of your contributions up to 3% of your salary or 50% of your contributions up to 6%, which means you will need to contribute 6% of your salary to a 401(k) to achieve that high. benefit from your employer. Many employees fail to maximize the potential of this benefit by simply not contributing enough to initiate that perfect match.

“If your employer matches any portion of your retirement contributions, consider cashing out by contributing at least the match amount,” advises Shamrell.

“This is considered part of your compensation and in fact, it’s free money. Most people don’t realize this, which is why 1 in 4 employees miss their full game.”

5. You can save more than you think

Many people think they’re limited to the 401(k) annual contribution cap, which comes in at $23,000 or $30,500 with catch-up contributions if you’re 50 or older this year, but you can actually save more than that.

“You can actually contribute more than the 401(k) annual limit with after-tax contributions,” Shamrell said.

While Roth IRAs (or individual retirement accounts) have income limits, 401(k) plans are different when it comes to Roth funds, according to Fidelity.

“Once you realize you’re going to max out your contributions, you may want to consider making after-tax contributions if your plan allows. This is the third type of contribution to your workplace savings plan, in addition to pre-tax and Roth,” an article from the company reads.

These donations can be made at the same time as your other donations. But Fidelity advises making sure your contributions aren’t too high to “prevent you from maxing out pre-tax and Roth contributions first.”

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