Freeman's Blog




If you’re lucky, your employer will match your contributions up to a certain level (e.g., 50 cents on the dollar up to 6% of your salary). You typically become vested in your employer’s contributions and related earnings through years of service (the details depend on the plan). Employer contributions are also pre-tax and are basically free money (once you’re vested), so you should try to take full advantage of them. If you fail to make contributions and receive no match, you are actually walking away from money your employer is offering to you.

Another feature that many 401(k) plans offer is the ability to borrow up to 50% of your vested balance (or $50,000, if less) at a reasonable interest rate. You can use a plan loan to pay off high-interest debts or meet other large expenses, like the purchase of a car. You typically won’t be taxed or penalized on amounts you borrow as long as the loan is repaid within five years. Repayment may be required within a shorter time frame, however, if you leave your employer. Loan payments are deducted from your paycheck with after-tax dollars.*

Finally, 401(k)s are a very convenient and reliable way to save. You decide what percentage of your salary to contribute, up to allowable limits. Your contributions are deducted automatically from your paycheck each pay period. Because the money never passes through your hands, there’s no temptation to spend it or skip a contribution here and there. Most plans allow for contributions as small as 1% of your pay.

Note: Your employer may also allow you to make after-tax “Roth” contributions to your 401(k) plan. Because your Roth contributions are after tax, they don’t reduce your current taxable income like pre-tax contributions. But because they’re after-tax, your Roth contributions are always tax free when paid out to you. The main attraction of Roth 401(k) contributions is that the earnings on your contributions are also tax free if your distribution is “qualified.” In general, a distribution is qualified if it is made more than five years after the year you make your first Roth 401(k) contribution, and you are either 59½ or disabled when you receive the payment.

*Due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, loans of up to 100,000 or 100% of your vested account balance may be allowed between March 27, 2020, and September 22, 2020. In addition, participants with outstanding loans held as of March 26, 2020, may be able to postpone any payments due between March 27 and December 31, 2020, for one year.

Are you taking full advantage of your 401(k)) plan? If you have multiple 401(k) plans, we can consolidate them & look at your overall retirement plan. So, contact me for a FREE ZOOM retirement strategy consultation today. Contact me  1-833-313-7233.