5 Tips for Contributing to a 401(k) Plan

Author: Jeff Horner, SVP, Wealth Management Strategist, The Private Bank 08/09/2022

Establishing a secure financial position to support yourself and your loved ones is a high priority for most people. One attractive option for your financial strategy is contributing to a 401(k) plan if one is available to you through your employer. The following tips can help you make contributing to a 401(k) plan an effective tool in your overall financial plan.

Take Advantage of a 401(k) Match

In addition to offering you a 401(k) plan, many employers offer a “match”, which is a certain percentage they contribute to augment your contributions. For example, an employer offering a 3% match will match your contributions, dollar-for-dollar, up to 3% of your salary. Terms and conditions will vary with different employers.

Stay Until You are Vested

Employers also typically will have a “vesting” requirement, which means that you must be employed with that employer for a certain length of time before you are entitled to receive the entire amount of the employer’s contribution. Should you decide to move on from your job before becoming fully vested, you may not be entitled to your employer’s full contribution amount. Contributing to a 401(k) plan is meant to be used as a long-term investment. Additionally, your vesting status may be something you wish to consider before deciding on a potential employer transition.

Maximize Your Tax Break

Contributing to a 401(k) plan allows you to invest a portion of your income before it is taxed by the IRS. In essence, you lower your taxable income by the dollar amount that you contribute to the plan. Up to certain income-dependent limits, the greater the amount you contribute, the lower your taxable income will be. Most 401(k) plans also have online resources that offer tools for planning and investing, such as calculators that estimate and predict retirement fund progress.

Consider Diversifying with a Roth 401(k)

A Roth 401(k) can also be an effective retirement-savings option, especially when you’re early in your career and in a lower tax bracket. While contributing to a 401(k) allows you to lower your tax burden, there is no similar tax benefit for contributions to a Roth 401(k); however, investment growth and qualifying withdrawals taken in retirement are tax-free.

Don’t Cash Out Early

Another key consideration for contributing to a 401(k) is the timing and purpose for any withdrawals. Except for a few narrowly-tailored exceptions, withdrawals taken prior to age 59½ will incur a penalty by the IRS. Additionally, the funds withdrawn prior to age 59½ without a valid exception are considered taxable income by the IRS.

Contributing to a 401(k) plan is an appealing long-term investment strategy because of employer matching, and because if you change employers, you don’t have to start over—you simply roll over the 401(k) amount into the next employer’s plan. To learn more about creating a solid financial strategy, please visit the Investing for the Future section of our website.


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