The CGS Team has shared the basics of retirement plans in the article Finance 101: Retirement Plans. We’ve shared the Millennial Woman’s Path to Retirement. And, City Girl Savings founder Raya has shared how she picked her 401k selections. Now, it’s time to share things to know about your 401k plan!
You already know how important a 401k is for your financial future, but there are a few other things you should know about your 401k and retirement plans in general, and the CGS Team is sharing 8 of those things with you!
#1 You Should Know Your Eligibility Date
Surprisingly, only about half of all employers allow new employees to start contributing to a 401k plan immediately. Some companies will allow you to contribute to a 401k plan after 2-3 months of service, while others may require a year.
Some employers will allow you to contribute immediately, but won’t begin matching your contribution until a specific date of service is met. Whether you just started a new job, or you haven’t confirmed your employer’s retirement options, your eligibility date is something that should be found out.
#2 You Should Know If You Were/Will Be Auto-Enrolled
According to U.S. News, 29% of employers auto-enroll their employees into 401k plans, unless an opt out was received by the employee. If you don’t know anything about your company’s retirement plan options, you could very well fall into that category. It’s important to know if you were auto-enrolled so you can find out where your plan is and what investment options have been pre-selected for you.
#3 You Should Know Your Employer’s Match Rate
This is extremely valuable information. When you know your employer’s contribution match rate, you know the minimum contribution you need to make to take advantage of it. Some employers match $.50 for every dollar, up to 5 dollars. Some employers match 3-6% of your overall salary. Whatever match you get, you need to be knowledgeable of it. Once you know, make sure you are contributing, at the very least, that amount.
#4 You Should Know Your Company’s Vesting Schedule
Did you know that even after your employer makes a contribution to your 401k plan, you don’t get to keep that money until you are vested in the retirement plan? According to U.S. News, “Less than half of plans (45 percent) immediately vest all 401k participants in the plan. Some employers don’t allow workers to keep any of the 401k match until they have been with the company for a specific number of years.”
Basically, this means that if your employer doesn’t fully vest employees until 3 years of service, if that employee leaves before the 3 years is up, they don’t get to keep any of that match they earned. This is very important to know, especially if you’ve been contributing to a 401k plan, but plan on leaving for a new job.
#5 You Should Know the Fees Associated with Your 401k Plan
Unfortunately, nothing is free, and that includes your 401k plan. Depending on whether your employer keeps retirement plans in house, or they outsource to a company like Vanguard or Fidelity, there are management fees associated with the plan. It’s important know what fees you are being charged, even if you don’t plan on changing anything.
#6 You Should Know You Will be Penalized for Early Withdrawals
Not only will you be taxed 20% for taking your retirement funds (or a portion of it) out early, you will also be hit with an early-withdrawal fee of 10%. That’s 30% going straight to the IRS! No thank you!
The point is, don’t take the money out before you retire. Some plans allow for loans against your 401k. There are no federal implications for this (unless you don’t pay it back), but you are skimping yourself on future growth.
#7 You Should Know if Roth is an Option for Your 401k Plan
For a little reminder, Roth essentially means “post-tax” funds. A traditional 401k plan takes your contribution before taxes are taken out of your income. A Roth 401k plan takes taxes out of your contribution.
The great thing about a Roth plan is that you won’t have to worry about paying taxes on that income when you retire. If you plan on being in a higher tax-bracket at retirement (think rental property owner, business owner, etc.) then you may as well get the taxes out of the way now, before your situation changes for the better financially!
#8 You Should Know What Assets are Available for You to Choose From
Unfortunately, you don’t have access to every asset available when it comes to your 401k plan. That’s fine though, too many options isn’t always a good thing! It’s important to know the asset options available to you so that you can add variety to your plan. Read How I Picked My 401k Selections if you don’t know where to start or what to choose.
Related: 5 Tricks to Get Caught Up with Your Retirement Savings
There are a lot of factors that go into your retirement plan, so it pays to be knowledgeable! What questions do you have about 401k plans or saving for retirement? How did you pick your 401k selections? We want to get the discussion going about retirement plans, so leave a comment below to join in!
1 thought on “8 Things to Know About Your 401k Plan”
Such an impactful read. Retirement is not a hot-topic among the younger generations, but it’s so important to spread the word on why everyone should start saving for retirement as soon as they possibly can.