Are you considering your retirement options? Did you know that nearly 90% of eligible employees now have a 401(k) account balance, with 86.9% actively contributing? This growing trend highlights the importance of retirement planning in today’s financial landscape. But what exactly is a 401(k), and how can it benefit you?Â
Let’s explore 15 essential questions about 401(k) plans, providing insights that can help you make informed decisions about your financial future.Â
1. What is a 401(k) plan?Â
A 401(k) plan is a retirement savings account sponsored by an employer. It allows you to save and invest a portion of your paycheck before taxes are taken out, potentially lowering your current taxable income.Â
2. How much can I contribute to a 401(k)?Â
For 2025, you can contribute up to $23,500 if you’re under 50. If you’re 50 or older, you can make an additional catch-up contribution of $7,500, bringing your total to $31,000. (2)Â
3. What types of investments are available in a 401(k)?Â
401(k) plans typically offer a range of investment options, including mutual funds, stocks, and bonds. The specific choices depend on your employer’s plan provider.Â
4. Are 401(k) contributions tax-deductible?Â
Yes, contributions to a traditional 401(k) are made with pre-tax dollars, reducing your taxable income for the year. However, you’ll pay taxes on withdrawals in retirement.Â
5. What is employer matching?Â
Many employers offer to match a portion of your contributions as an added benefit. This is often structured as a percentage of your contributions, up to a certain limit.Â
6. What happens to my 401(k) if I change jobs?Â
You have several options: roll it over into your new employer’s plan, transfer it to an Individual Retirement Account (IRA), leave it with your former employer (if allowed), or cash it out (though this may incur penalties and taxes).Â
7. Are there penalties for early withdrawal?Â
Generally, withdrawing funds before age 59½ incurs a 10% penalty, plus regular income tax on the amount withdrawn. Some exceptions apply for specific circumstances.Â
8. Can I borrow from my 401(k)?Â
Some plans allow loans from your balance, which you’ll need to repay with interest within a specified timeframe. However, borrowing can impact your long-term savings growth.Â
9. What are Roth 401(k) contributions?Â
Roth 401(k) contributions are made with after-tax dollars. While you don’t get an immediate tax break, qualified withdrawals in retirement are tax-free.Â
10. How much should I save in my 401(k)?Â
While individual circumstances vary, many financial professionals suggest saving 10-15% of your salary. This should be adjusted based on your retirement goals and other savings.Â
11. What is vesting?Â
Vesting refers to your ownership of employer contributions to your 401(k). Your contributions are always 100% vested, while employer contributions may follow a vesting schedule.Â
12. Can I change my contribution amount?Â
Yes, most plans allow you to adjust your contribution amount periodically, subject to the plan’s rules and contribution limits.Â
13. How is a 401(k) handled in a divorce?Â
A 401(k) can be considered marital property and may be divided through a Qualified Domestic Relations Order (QDRO) in the event of divorce.Â
14. When can I withdraw from my 401(k) without penalties?Â
You can typically withdraw without penalties at age 59½, or under certain circumstances such as disability or financial hardship. (3)Â
15. How do I monitor my 401(k) performance?Â
Most plans provide regular statements and online access to your account, allowing you to track your investment performance and make informed decisions.Â
As we’ve explored these key questions, it’s clear that 401(k) plans play a crucial role in retirement planning. However, navigating the complexities of these plans can be challenging. How can you ensure you’re making the most of your 401(k) options? How do you align your retirement savings strategy with your broader financial goals?Â
Every financial journey is unique, and understanding the intricacies of 401(k) plans requires careful consideration. We invite you to schedule a complimentary meeting to discuss your specific situation and explore how these insights can be applied to your retirement planning strategy.Â
Sources:
(1) American Society of Pension Professionals & Actuaries. “401(k) Participation Rates Remain Strong.” ASPPA, 2023, https://www.asppa-net.org/news/2025/1/good-news-for-401k-savings-participation-rates-in-23/Â
(2) EP Wealth Advisors. “How Much Can I Contribute to a 401(k) in 2025?” EP Wealth, 10 Feb. 2025, www.epwealth.com/blog/how-much-can-i-contribute-to-a-401k-in-2025.Â
(3) Waun, Vicki. “Understanding the Rules for 401(k) Withdrawal After 59 1/2.” Human Interest, 6 Dec. 2024, www.humaninterest.com/learn/articles/understanding-the-rules-for-401k-withdrawal-after-59-1-2.Â
We do not provide tax or legal advice or services. Always consult with qualified tax and legal advisors concerning your own circumstances. This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual situation. Please seek the guidance of a financial professional regarding your particular financial concerns. Consult with your tax advisor or attorney regarding specific tax issues. Investing involves risk, including possible loss of principal. No investment strategy can ensure financial success or protect against losses. For more complete information about your 401(k) investment options, call your company’s plan administrator or your financial professional for a prospectus. The prospectuses contain details on investment objectives, risks, fees, and expenses, as well as other information about your plan’s investment options, which you should carefully consider. Please read the prospectuses thoroughly before sending money.
