Nationwide 401(k) Retirement Plans

Investing & retirement

A retirement plan may be one of the most valuable benefits of employment. Used effectively, it can deliver a long-term impact on your financial well-being. See how a retirement plan works and learn about the power you have to control your financial future.

 

In general, a 401(k) is a retirement account that your employer sets up for you. When you enroll, you decide to put a percentage of each paycheck into the account. These contributions are placed into investments that you’ve selected based on your retirement goals and risk tolerance. When you retire, the money you have in the account is available to support your living expenses.

You may get matching contributions from your employer

Your employer may match a certain percentage of your 401(k) contributions – most do. For example, if your company matches 0.5% for every 1% you contribute up to 6%, that translates into an extra 3% in your account if you contribute 6% or more.

With the example above, your $3,000 contribution plus your employer’s match would add $4,500 to your 401(k). (The plan may have rules when the matching contribution is vested. See your employer for details.)

You can avoid an additional 10% early withdrawal tax by leaving your money in the 401(k) plan

Because 401(k)s are retirement savings plans designed to help you save for retirement, any money you take out early will be subject to an additional 10% early withdrawal tax unless an exception applies. First, any amounts withdrawn will be subject to ordinary income tax. Second, unless an exception applies, money taken prior to age 59 1/2 will be subject to an additional 10% early withdrawal tax. Finally, if you do not roll this money over, it will be subject to mandatory 20% federal tax withholding.

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Are you prepared for retirement?

How much should I contribute to my 401(k)?

Planning for retirement is a complex process that starts with an easy first step: saving money. A commitment to regular savings, as early as possible, will launch your retirement planning in the right direction.

As you get closer to retirement, you may want to be more purposeful about your savings. “How much should I contribute to my 401(k)?” is one of the most common questions that financial services folks hear.

Figuring out how much to put in your 401(k) depends on your overall goals and financial situation, so it will vary for each person. The amount you can save is also determined by the Internal Revenue Service (IRS), because there are limits on how much money can be put aside.

Your employer may match a certain percentage of your 401(k) contributions – most do. For example, if your company matches 0.5% for every 1% you contribute up to 6%, that translates into an extra 3% in your account if you contribute 6% or more.

With the example above, your $3,000 contribution plus your employer’s match would add $4,500 to your 401(k). (The plan may have rules when the matching contribution is vested. See your employer for details.)

You can avoid an additional 10% early withdrawal tax by leaving your money in the 401(k) plan

Because 401(k)s are retirement savings plans designed to help you save for retirement, any money you take out early will be subject to an additional 10% early withdrawal tax unless an exception applies. First, any amounts withdrawn will be subject to ordinary income tax. Second, unless an exception applies, money taken prior to age 59 1/2 will be subject to an additional 10% early withdrawal tax. Finally, if you do not roll this money over, it will be subject to mandatory 20% federal tax withholding.

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401(k) contribution limits

For 2021, the IRS allows 401(k) participants to set aside up to $19,500 per year. If you are older than 50, your plan may allow you to contribute an additional $6,500 per year as a “catch up” contribution. Keep in mind that your plan may not allow you to make the full contribution. (The IRS frowns on corporate retirement plans that favor senior executives, so they limit the amount of money that an employee can deduct if only the most highly compensated employees at a company are participating in the 401(k) plan).

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