According to Fidelity, roughly 294,000 people are 401k millionaires
If you want to join them, you need to know the details
Here are 10 facts about 401ks that everyone needs to know:
If you want to join them, you need to know the details
Here are 10 facts about 401ks that everyone needs to know:
First, what is a 401k?
A 401k is a retirement savings plan that is offered by many American employers. It is named after a section of the US Internal Revenue Code.
Ok so now on to the facts
A 401k is a retirement savings plan that is offered by many American employers. It is named after a section of the US Internal Revenue Code.
Ok so now on to the facts
Fact 1:
There are 2 types of 401k's
Traditional and Roth
Traditional 401k contributions are pre-tax which reduces taxable income but are taxed upon withdrawal
Roth contributions are after tax and are tax-free at withdrawal.
There are 2 types of 401k's
Traditional and Roth
Traditional 401k contributions are pre-tax which reduces taxable income but are taxed upon withdrawal
Roth contributions are after tax and are tax-free at withdrawal.
Fact 2:
Employee contributions to a 401k are deducted from gross income before income taxes are taken out.
Because of this, the employee's taxable income is reduced by the total amount of contributions for the year and can be reported as a tax deduction for that tax year.
Employee contributions to a 401k are deducted from gross income before income taxes are taken out.
Because of this, the employee's taxable income is reduced by the total amount of contributions for the year and can be reported as a tax deduction for that tax year.
Fact 3:
A 401k is known as a "defined contribution plan"
This is just a term that is used to describe a retirement plan like a 401k or 403(b)
Not that important but it's good to know.
A 401k is known as a "defined contribution plan"
This is just a term that is used to describe a retirement plan like a 401k or 403(b)
Not that important but it's good to know.
Fact 4:
Unlike pensions, it is up to the employee to choose which investments to park their money in.
Typical 401ks have a range of options like stocks, bonds, mutual funds or target date funds.
Unlike pensions, it is up to the employee to choose which investments to park their money in.
Typical 401ks have a range of options like stocks, bonds, mutual funds or target date funds.
Fact 5:
For 2022, the annual limit you can contribute is $20,500 if you're under age 50.
If you're over 50 you can make a $6,500 catch-up contribution in 2022.
For 2022, the annual limit you can contribute is $20,500 if you're under age 50.
If you're over 50 you can make a $6,500 catch-up contribution in 2022.
Fact 6:
Most 401k plans offer matching.
This means that your employer will match a certain amount if you contribute a certain percentage
For example, your employer may contribute 50 cents for each dollar contributed up to a certain percentage invested.
This is free money!
Most 401k plans offer matching.
This means that your employer will match a certain amount if you contribute a certain percentage
For example, your employer may contribute 50 cents for each dollar contributed up to a certain percentage invested.
This is free money!
Fact 7:
You can split your contributions between a traditional 401k and a Roth 401k
However, the contributions between the two accounts cannot exceed the limit for one account which is $20,500 if you're under 50.
You can split your contributions between a traditional 401k and a Roth 401k
However, the contributions between the two accounts cannot exceed the limit for one account which is $20,500 if you're under 50.
Fact 8:
Some employers allow you to take a loan out on your 401k.
If you do this and leave your job, you'll have to pay it back in a lump sum or face the 10% early withdrawal fee.
I know a guy that made this mistake. Not pretty.
Some employers allow you to take a loan out on your 401k.
If you do this and leave your job, you'll have to pay it back in a lump sum or face the 10% early withdrawal fee.
I know a guy that made this mistake. Not pretty.
Fact 9:
Traditional 401k's are subject to RMD's or required minimum distributions.
At age 72, you are forced to withdraw a certain amount.
The percentage is based on a fancy calculation that the IRS uses to figure out your life expectancy.
Little shady but it is what it is.
Traditional 401k's are subject to RMD's or required minimum distributions.
At age 72, you are forced to withdraw a certain amount.
The percentage is based on a fancy calculation that the IRS uses to figure out your life expectancy.
Little shady but it is what it is.
Fact 10:
When you leave your job you have a few options for managing your 401K. You can:
- Withdraw the money
- Roll your 401k into an IRA
- Just leave it at the old employer
- Move it to your new employer
I'll do a deep dive into this in the future.
When you leave your job you have a few options for managing your 401K. You can:
- Withdraw the money
- Roll your 401k into an IRA
- Just leave it at the old employer
- Move it to your new employer
I'll do a deep dive into this in the future.
And that's it for this one.
There is a lot more to 401ks and ill cover more details in the future.
Hopefully, you learned something new.
There is a lot more to 401ks and ill cover more details in the future.
Hopefully, you learned something new.
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