Where do you start? How much do you contribute? What do you do if there’s no company match? Should you take the Roth option? There’s lots to consider with this important retirement asset.
When working with clients to develop their financial plans, integrating 401(k) accounts into an overall retirement strategy is an important part of the process.
For most people, their 401(k) represents their largest source of funds set aside for retirement. Whether deciding how much to contribute, choosing investments within the 401(k), or wondering if it is the best way to save for retirement, here are six tips to get you started.
1. What do I need to think about during enrollment?
Assuming your company offers a retirement plan — 401(k)s and 403bs are most common — your HR department will address enrollment when you are hired. For existing employees, if the company is rolling out a new 401(k) plan, there will typically be a group meeting where HR and a representative from the plan sponsor — Fidelity Net Benefits, Vanguard and Prudential are a few common providers, but there are MANY more — will summarize the plan and lead you through enrollment. In both circumstances, you will typically receive your login credentials for your online investor portal where you can complete your investment choices and set up your contributions. Two things you need to keep in mind during enrollment:
- You must clearly understand the company match. If at all possible, contribute up to the company match to maximize your employer’s contributions.
- If there is no company match, it may be better to focus on personal Roth IRA and IRA contributions before considering your employer retirement plan.
2. Should I choose a Roth or Traditional IRA?
Though not as common, more employer retirement plans are offering Roth options. Choosing between traditional or Roth to save for retirement is an important decision. You must realize that in a traditional 401(k), you are notgetting a tax write-off from your pre-tax contributions: You are getting a tax deferral. You will eventually pay taxes on the money in these accounts funded with pre-tax dollars when you take withdrawals in retirement. It is very important to understand that you will pay tax not only on the pre-tax contributions, but on all the gains as well.