411 for your 401(k)

As consumers around the country prepare for the end of summer, many are getting organized for back to school season. This is also an opportune time to make a checklist to clean up your financial house and conduct an annual review of your 401(k) plan so that you are taking advantage of all the benefits it can offer.

If you are like most working Americans, your 401(k) plan is the cornerstone of your retirement savings. Following the below tips can help you be ready to retire with the dignity and financial security you expect and deserve.

Tip #1: Establish a Retirement Plan for Your Firm

If you’re a small firm owner or partners, and don’t sponsor a retirement plan for yourself and your employees, you should strongly consider it. Nine out of 10 lawyers (90%) work for firms that have fewer than 10 attorneys. The preponderance of small firms is a distinct characteristic of the legal community. Unfortunately, this also means that an employee’s access to a retirement savings vehicle such as a 401(k) may be limited. A 2011 survey conducted by the Employee Benefit Research Institute estimates that access to an employer-sponsored retirement plan is lower with smaller employers. As a matter of fact, only 17.3% of companies with fewer than 10 employees sponsor a retirement plan. The first step to meeting your retirement needs is having access to a plan. It’s also a great way to attract and retain talented employees. If you’re not sponsoring a plan today, think about establishing one.

Tip #2: Enroll in your Plan

If you haven’t yet enrolled in your 401(k) plan, make it a point to do so now. People are living longer now than ever before. According to a 2011 report by the U.S. Census Bureau, the U.S. is projected to have nine million people above the age of 90 by 2050—this is up from 1.9 million in 2010 … and 720,000 in 1980. This means our nation's 90-and-older population has nearly tripled over the past three decades … and is projected to quadruple over the next four decades. These longer life spans, coupled with spiraling healthcare costs, the uncertain future of Social Security and the decline of public pensions mean individuals are increasingly responsible for funding their own retirement. Contributing to a 401(k) plan can put you on the right track to be able to fund your retirement years. The money you contribute is tax-deferred from both federal and state income taxes, which means you don’t pay taxes on the contributions until you withdraw the funds, typically at retirement age. For example, if you are in the 28% tax bracket and you invest $5,000 a year, that’s $5,000 of your salary on which you are not paying taxes. This reduces your annual tax bill on that $5,000 by nearly one-third—$1,400 ($5,000 x .28). Furthermore, contributions to the plan are deducted automatically from your paycheck, making the process seamless for you. By contributing even a small amount on a regular basis, you can build substantial wealth over the long-term. Even just one or two percent can make a big difference.

If you’re unsure about how much you should contribute, take advantage of the many helpful online tools and resources available to you, such as Voya’s MyOrangeMoney (Voya.com). These tools offer an easy way for you to determine how much you need to save to reach your retirement income goal, and how different contribution rates will impact your retirement savings.

Tip #3: Leverage Both Pre-tax and Post-tax Contributions

If your plan allows for both traditional pre-tax and after-tax (Roth) contributions, evaluate which is a better option with your individual situation. You also have the option to split the deferral types. While pre-tax contributions allow you to contribute to the plan on a pre-tax basis, Roth contributions allow you the opportunity to grow these contributions tax-free. This is a valuable feature if you believe your taxes will be higher when you retire, since you will pay taxes on the contributions now based on a lower tax bracket and pay no taxes on the earnings when you retire.

Tip #4: Take Advantage of Matching Contributions

If your employer offers a company match, take advantage of it! This is a valuable benefit where your employer will match your contributions—typically capped at a percentage of your pay. For example, a company may offer a dollar-for-dollar match up to 3% of pay, or a 50% match up to 6% of pay. Find out what your employer will match and, at the very least, contribute enough to take advantage of the match.

Tip #5: Make Catch-up Contributions

If you are age 50 or older (or will be by the end of the calendar year) and your plan allows, take advantage of the “catch-up” provision. Legislation has made it easier for you to save more for your retirement with the permanence of the “catch-up” provision outlined in the Pension Protection Act of 2006. In addition to the general deferral limit of $18,000 for 2017, you can contribute an additional $6,000 for a total of $24,000. This means if you are 50 years old this year and haven’t started saving for retirement, you can contribute as much as $225,000 over the next ten years—tax-deferred—to your 401(k) plan. When you consider the potential of compound earnings, this can add up to significant savings.

Tip #6: Keep your Savings Working for You  

Even if the plan allows you to borrow from your plan, think twice before doing so. While it may sound appealing, borrowing from your 401(k) reduces the benefit of tax-free compounding that is the key to building up savings. Although sometimes unavoidable, before you make the decision to take a loan, there a few considerations to take into account:

  • You will pay interest on the loan with after-tax dollars, thereby losing the tax advantage.
  • You will pay taxes a second time when you eventually withdraw the money in retirement.
  • Interest on the loan is not tax-deductible, even if funds are used for a home purchase.
  • Most loans must be paid back within five years, but if you leave your job, the loan must be paid back in full immediately or the amount becomes a taxable withdrawal.

Tip #7: Invest for the Long Term 

Once you set your investment allocations, be patient. Predicting the market is not like predicting the weather. There are no high-tech gadgets or radar systems to predict the highs and lows that may lie ahead. It’s critical to remember that what is important is time in the market, not timing the market. Discipline yourself to maintain your allocation through down markets as well as up markets. Having a properly diversified portfolio will help make any market swing easier to digest. Conduct an annual review of your plan to confirm your allocations still align with your life stage and economic circumstances.

Tip #8: Consider Spending Time with a Financial Professional. 

Research1 suggests that those who spend time with a financial professional are saving more than their peers who do not, with greater investment knowledge and confidence in their ability to enjoy retirement. If you have never received help from a financial professional before, this is something to consider pursuing.

Information is power. Knowing how to take advantage of these simple—but important—tips can positively impact your ability to live comfortably in retirement.

 

1 Advisor Value, A Voya Retirement Research Institute® Study, 2015, www.VoyaRetirementResearchInstitute.com

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Press inquiries: Christine Hotwagner

Program Operations Director ABA Retirement Funds JoinUs@ABARetirement.com

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