401(k) Planning

Learn More About 401(k) Planning with Westminster Wealth Management

401(k) Planning

A 401(k) is a plan offered by employers in which a percentage of each paycheck is taken out before tax and placed into an investment account. Investments within a 401k or 403b plan are generally more restricted than what is found within IRA’s.

  • Traditional 401(k): Employee contributions are taken from gross income, before the deduction of income taxes.
    • The amounts contributed are not included for income tax purposes for the current year, and no taxes are due on contributed capital or earnings from the investment account until you withdraw money from the 401(k)
  • Roth 401(k): Employee contributions are made from funds that have already been taxed
    • When employers offer both traditional and Roth 401(k) plans, you have the option to combine them
    • When money is eventually withdrawn, if the account has been open for greater than 5 years, and if the employee is over the age of 59.5, there are no taxes due.

For employees under 50, total employee-employer contributions can be no more than $61,000 per year, while employee contributions must be less than $20,500 in 2022. For employees over 50, the limit is $67,500. Additionally, after the age of 72, retirees must withdraw a percentage of their 401(k) according to life expectancy as set by the IRS, which is called a Required Minimum Distribution. You cannot withdraw from your 401(k) until you are 59 ½ without facing a 10% early withdrawal tax in addition to regular income taxes. Upon the resignation of a job, you have the options of withdrawing money, converting the 401(k) into an IRA, leaving the 401(k) with your previous employer, or moving the 401(k) to a new employer.

Overall, the main upside of 401(k) planning is the tax advantage it gives you while saving for retirement. If you have any questions about 401(k) planning, feel free to contact us!