A Sophisticated  Approach to Financial Services

A recent CNBC Your Money Survey reveals 46% of 401(k) investors are unaware of the specific investments in their workplace retirement plan.¹  Considering 401(k)s are most people’s largest asset, this is troubling.  However, advisors cited in the article argue that this lack of knowledge may not necessarily be a cause for concern.  Their reasoning? Many employers automatically enroll their workers into a 401(k) plan and put them into target date funds (TDFs).  Ellen Lander, principal and founder of Renaissance Benefit Advisors Group was quoted in the article saying: “It’s probably better for most people than trying to do it yourself.”²  The idea of TDFs is that you don’t have to be all that engaged with your 401(k) because the fund will adjust over time based on your proximity to retirement in terms of risk.  While contributing to your 401(k) is better than not, we respectfully disagree that target date funds are in investors’ best interest – especially those investors who don’t know what’s in their 401(k)s.  And, instead of telling investors to just settle for investing in a target date fund,  there is a better way to ensure you’re on track for a prosperous retirement.  And that solution is professional 401(k) account management. Keep reading to see why target date funds may not be right for your retirement savings and how professional 401(k) account management may help improve your account performance more than you think.

The Trouble with Target Date Funds

Target date funds are popular in part because investors are automatically enrolled in them. According to the Plan Sponsor Council of America, almost 59% of employers sponsoring a 401(k) plan used auto-enrollment in 2021, up from 47% in 2012.³ Target date funds also simplify the 401(k) investing process for those who don’t want to or don’t have time to engage with their 401(k)s on a regular basis. [Please have the underlined open to the target date funds guide pop up]   This allows investors to set it and forget it. They don’t have to worry about constructing a portfolio or even managing it. All they have to do is contribute each paycheck and that’s it.  But there’s a big problem with this: Target date funds fail to take into consideration that not all investors are created equal.  If you expect to retire in 2050, you’re grouped into a fund with others expecting to retire at the same time.  Your specific goals and risk tolerance aren’t taken into consideration.  Instead, the fund you’re in moves its allocation to more conservative mutual fund investments and away from riskier mutual fund investments the closer you get to retirement.  See the problem with everyone your age having the same investing strategy?  Another issue is that target date funds don’t always produce the results you expect.  They often underperform in good markets and do a poor job of managing downside risk during tough markets. They do not take into consideration changes in the economy, tax policy, trade, earning reports, or investment trends – and may not make adjustments for any of these driving factors that affect investment performance. Check out Why Relying Only On Target Date Funds May Hurt Future Retirement Account Performance.

How to Maximize Your 401(k) Retirement Savings

If target date funds may not help you maximize your 401(k) retirement savings and you don’t want to build and manage your own portfolio, then what’s the solution to grow and protect your money?  Professional 401(k) account management. In addition to managing your investments and quarterly rebalancing your 401(k), personalized account management may also help you stay on course to meet your retirement goals and increase returns.  It may also…

• Help you identify the fees inside your 401(k) and help you know if you’re paying too much.
• Take the emotion out of financial decisions – especially during times of geopolitical uncertainty like we’re in right now. 
• Save you time and effort and allow you to focus on other things in your life knowing your account is taken care of.   

And, most importantly, it may also help you keep more of your hard-earned money because it has been shown to increase 401(k) investors’ returns. Aon Hewitt and Financial Engines conducted a study from 2006 to 2012 comparing the returns of investors who sought help in the form of online sources or managed accounts to those who managed their 401(k)s themselves.  The study examined the 401(k) investing behavior of 723,000 workers at 14 large U.S. employers. It showed that investors who received professionally managed help earned higher median annual returns than those who invested alone.  In fact, participants who had their assets managed by professionals saw an average of 3.32% (net of fees) more in returns annually than those who managed their own accounts.⁴ The study revealed, “If two participants—one using Help and one not using Help—both invest $10,000 at age 45, assuming both participants receive the median returns identified in the report, the Help participant could have 79 percent more wealth at age 65 ($58,700) than the Non-Help participant ($32,800).”⁵ Don’t think 3% can make a significant difference come retirement? Check out the potential of adding 3% more to your 401(k) over time.

To see how 3% may improve your 401(k) performance, check out our retirement calculator. 401(k) Maneuver provides professional account management to help you increase your account performance over time, manage downside risk to minimize losses, and reduce fees that are hurting your retirement account performance.  Our done-for-you, virtual service allows you to keep your 401(k) right where it is while we review and rebalance your account based on your risk tolerance and current market conditions. We review and rebalance your account for you with the goal in mind of keeping you in what is working and out of what is not. With 401(k) Maneuver, you can go about your life doing what you love with confidence, knowing we are managing your 401(k) for you.  See how it works.

Have questions or concerns about your 401(k) performance? Click below to book a complimentary 15-minute 401(k) Strategy Session with one of our advisors today.

Book a 401(k) Strategy Session

Sources:

1. https://www.cnbc.com/2023/09/07/almost-half-of-401k-investors-clueless-about-their-investments-cnbc.html
2. https://www.cnbc.com/2023/09/07/almost-half-of-401k-investors-clueless-about-their-investments-cnbc.html 
3. https://www.cnbc.com/2023/09/07/almost-half-of-401k-investors-clueless-about-their-investments-cnbc.html
4. https://corp.financialengines.com/employers/FinancialEngines-2014-Help-Report.pdf
5. https://corp.financialengines.com/employers/FinancialEngines-2014-Help-Report.pdf

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In an ideal marriage, both spouses want the best for each other. This includes a comfortable retirement.

Unfortunately, there is one 401(k) mistake married couples make without even realizing they are doing it. 

It may seem small, but it can make a big impact on your retirement future. 

The mistake? Not communicating and clearly deciding how to deal with your 401(k) company match. 

A recent study found 1 in 4 couples fail to take full advantage of company matching contributions to 401(k) plans.¹ 

This oversight is costing them nearly $700 a year. 

According to the paper titled “Efficiency in Household Decision Making: Evidence from the Retirement Savings of U.S. Couples,” released in April 2023 by the National Bureau of Economic Research, “These couples could increase their retirement wealth without changing their consumption (or increase their consumption at no cost to retirement wealth) by simply reallocating existing contributions from the account of the spouse with a lower marginal match incentive to the account of the spouse with a higher marginal match incentive.”² 

If married couples took time to communicate and reallocate their 401(k) retirement plans, they could save more for the future without having to change their current lifestyle.

Not All Company Matches Are Created Equal

A typical 401(k) match may be around 3% – 6% of the employee’s salary. 

This means that if you contribute up to your company’s match, you will receive that same amount back into your retirement plan from your employer.

It is free money, which is why you should strive to contribute enough to receive the company match. 

However, not all 401(k) plans are created equal – and that includes company matching. 

Some companies offer a dollar for dollar match, otherwise referred to as a 100% match, or full match. 

With this type of match, your employer matches your entire contribution up to a certain amount.

Other companies may offer partial matching. This is when your employer matches your contributions up to a certain percentage. 

Understanding your 401(k) plan’s matching type is important whether you’re married or single.

But, as you’re about to find out, it’s critical for married couples – unless you want to leave money on the table.

The 401(k) Mistake Married Couples Make

So, what do you do when you become two instead of one? What do you do about the company match?

This is where married couples start losing out on retirement savings.

Couples mistakenly allocate their funds and savings.

For example, one spouse invests in the 401(k) plan, always meeting the company match.

The other spouse takes care of household bills and leaves the 401(k) plan and retirement up to the spouse.

It seems like an okay plan…unless you are contributing heavily to the 401(k) plan offering the lower company match.

As Niv Persaud explains to USA Today, “My income was going toward our expenses, and he was going to focus on retirement. And I had a great company match, and I didn’t pay attention to that.”³

Unfortunately, Persaud’s marriage ended, and she discovered just how much retirement savings she lost.

Even if you aren’t worried about divorce, failing to maximize each other’s 401(k) company matches may have big repercussions.

The “Efficiency in Household Decision Making: Evidence from the Retirement Savings of U.S. Couples” study found, “Exploiting differences in matching incentives across employers, we find that a quarter of couples could increase their total retirement saving, by an average of nearly $700 per year, simply by reallocating some of their existing contributions to the account of the spouse with a higher marginal employer match rate.”⁴

Contribute to Your 401(k) the Right Way

The Efficiency study makes it clear that couples do not have to come up with new saving strategies to save an average extra $700 a year.

The study found that couples should simply reallocate their contributions to whichever 401(k) employer matching contribution is better.

Again, all 401(k) plans are not created equal. 

Take a close look at your company’s plan and your spouse’s plan to determine which plan has the better company match. Then, reallocate accordingly.

If you and your spouse aren’t sure about how to reallocate, speak to a financial advisor.

Communicate and Communicate Some More

While the common 401(k) mistake married couples make is not allocating their investments according to their company match, they also make communication mistakes.

Money is the number one issue couples fight about.⁵

Instead of fighting over money, put all your cards on the table.

Openly discuss your finances and financial situation with your spouse.

Talk about how you envision retirement and how you plan to make that vision come true.

Work together to make your retirement dreams come true. 

According to the Efficiency study, “The strength of marital commitment is associated with optimizing retirement contributions.”⁶

Financial communication is essential to the health of a marriage – and your future.

Have questions about your 401(k) performance? Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors. 

Book a 401(k) Strategy Session

Sources

1. https://www.nber.org/system/files/working_papers/w31195/w31195.pdf
2. https://www.nber.org/system/files/working_papers/w31195/w31195.pdf
3. https://www.usatoday.com/story/money/2023/10/22/how-1-in-4-couples-is-giving-up-free-money-in-their-401-k-plans/71225707007/
4. https://www.nber.org/sites/default/files/2023-05/NB21-11%20Choukhmane%2C%20Goodman%2C%20O%27Dea%20FINAL%20-%20cleared..pdf
5. https://www.ramseysolutions.com/retirement/marriage-investing
6. https://www.nber.org/sites/default/files/2023-05/NB21-11%20Choukhmane%2C%20Goodman%2C%20O%27Dea%20FINAL%20-%20cleared..pdf

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No one wants to come across as Scrooge during the holidays, but without managing holiday gift expectations, many people wind up saying, “Bah Humbug!”

When we fail to manage holiday gift expectations, we tend to spend more than we should, and find ourselves in debt well into the new year.

Both are outcomes no one wants.

Take a look at these findings from LendingTree’s 2022 Holiday Debt report: 

• “In 2022, 35% of Americans took on holiday debt, down a tick from last year’s 36%, but the average amount among those who took some on this year is $1,549. That’s up 24% from last year and is the highest in the eight-year history of the LendingTree holiday debt survey.” 
• “The percentage of holiday debtors who say it’ll take five months or more to pay off that debt rose significantly, too, going from 28% a year ago to 37% today. There’s never a good time to carry debt, but this is a particularly bad time with interest rates at record highs.” 
• “63% of those who took on holiday debt didn’t plan to do so, up from 54% a year ago.”¹

When we go too much into debt, we often cut back on how much we save for retirement and everyday emergencies. 

This is a huge mistake!

So, why do we do it?

According to Everyday Health, “A lot of us have high expectations when it comes to the holidays. If you have to cut back on gift-giving or other seasonal festivities, [financial psychotherapist Alex Melkumian, PsyD] says: ‘This may bring up feelings of shortcomings and being less than.’”²

Let’s just be honest here.

Sometimes we overspend during the holidays for this very reason. We don’t want to feel less than.

We don’t want to give our kids less. We don’t want to come up short during the gift exchanges. 

It doesn’t have to feel this way.

The key is to manage holiday gift expectations. It may feel awkward the first holiday season you try, but, as the years pass, it will seem normal and expected.

Here are 10 tips to help you manage holiday gift expectations.

#1 Know Where You Stand Financially

Before you spend a cent on gifts this year, you need to take a good hard look at your finances.

• How much discretionary income do you actually have? 
• How much debt do you need to pay off?
• What can you responsibly spend this holiday season?

Be honest with yourself about what you can and cannot afford. 

[Related Read: 10 Ways to Avoid Taking on Holiday Debt This Year]

#2 Remind Yourself Why

Another way to manage holiday gift expectations is to remind yourself why – why you can’t spend over X amount.

Go back to step one. You know what you can spend without throwing your finances into a tailspin. 

When you feel pressured by others to spend more than you know you can, remember why you are buying gifts in the first place. 

Gift-giving shouldn’t be something that you are forced to do. It should be something you do to show you care.

Remember, you can’t buy love.

#3 Set a Budget

Before you set your gift budget, consider the other items you’ll need to pay for during the holiday season.

Will you travel? Will you host your family? Are there traditions that you must follow?

Add these items to your budget.

The remainder of your budget is for gifts.

#4 Create Gift Boundaries

Now take that holiday budget and make a list of all the people you plan to give a present to.

Decide how much to spend on each person on your list.

This is also known as creating gift boundaries.

For example, I’ll spend $150 per child and $20 per teacher.

#5 Make a List – Check It Twice

It is helpful to make a list of all the people on your Christmas list, alongside the amount you plan to spend on each person.

Keep a detailed list of what you buy for each person and how much you’ve spent.

Tip – Use the notes feature on your phone to keep track of your list. Or download the app Santa’s Bag to keep track of gift recipients, present ideas, and individual budgets.

It is easy to get carried away with holiday sales only to discover you bought two things for one person and nothing for someone else. Or you overspent on someone.

#6 Be Honest

An effective way to manage holiday gift expectations is to simply be honest.

Be honest with your kids about your gift boundaries.

Let kids know when they ask for gifts that are outside of your holiday budget.

Be honest with your family about your gift boundaries.

Speak up and let family members know you only plan to spend around $30 on each person this year.

You may be surprised to find the rest of your family members are thankful.

#7 Go All In with Group Gifts

If someone you love really wants a gift that is outside of your budget, ask if anyone else would like to go in with you.

Group gifts are a great way to alleviate financial pressure while still ensuring your loved one gets something they really love.

For example, my sibling and I went in on a group gift for my elderly parents one Christmas, and they were thrilled. They much preferred the one nice gift from all of us to a bunch of small things they didn’t really need or want.

Similarly, if your kid has a present that she has to have that is not budget-friendly, mention it to aunts and uncles. 

They may prefer to buy this present for her as a group gift.

#8 Get Creative with Alternative Gifts

Managing gift expectations also includes managing what you believe you must get someone.

Sometimes people overspend because they feel as if they must get a fancy gift, such as a designer cashmere sweater.

Instead, think outside the box for other gifts your loved ones may like, such as experience gifts or the gift of time.

Give your brother and sister-in-law with a new baby a coupon for “free” babysitting. Take time to complete a special DIY project that you know your mother will love. Buy your nephew in college a month of a streaming service. 

It’s not the price that matters, but the gift itself.

[Related: 9 Ways to Keep Online Holiday Spending under Control This Year]

#9 Focus on Quality, Not Quantity

Similarly, manage your holiday gift expectations by focusing on quality, not quantity.

You may dream of giving your kids a Christmas with dozens of presents under the tree, but that may not be financially responsible.

Instead, focus on giving people quality gifts.

It is much better to give one or two meaningful gifts rather than dozens of random gifts the recipient may or may not even like.

#10 Start Saving for Next Year

If you struggle with managing holiday gift expectations, go ahead and make plans to start saving for the 2024 holiday season.

Create space in your budget to save a little each month for the holidays.

Better Prepare for a Life of Abundance in Retirement.
Check us out on YouTube.

Book a 401(k) Strategy Session

Sources

1. https://www.lendingtree.com/credit-cards/study/holiday-debt/
2. https://www.everydayhealth.com/emotional-health/worried-about-money-this-holiday-season-heres-what-financial-psychologists-want-you-to-know/

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The IRS just announced contribution limits for qualified retirement plans for 2024.  

Keep reading below to find out exactly how much you can contribute for 2024, and start making plans now to do what you can to max out your retirement savings next year.

401(k) Retirement Plan Contribution Limits for 2024

401(k)s

Employees with 401(k)s, 403(b)s, most 457 plans, and federal Thrift Savings Plans can contribute up to $23,000, up from $22,500.

For those ages 50 and older, the 401(k) catch-up contribution remains at $7,500 for 2024 – for a total of $30,500.

Solo 401(k)s 

If you have a Solo 401(k), otherwise known as a Self-Employed 401(k) or Individual 401(k), the contribution limit rises to $69,000. The catch-up contribution remains $7,500 for those 50 or above.

IRA Contribution Limits for 2024

IRAs 

IRA contributors will be able to invest up to $7,000 in 2024, up from $6,500, with the catch-up contribution limit for those 50 or older set at $8,000.

Expert Tip: You can contribute the maximum for 2023 until Monday, April 15, 2024. If you have an IRA, plan now to maximize the contribution limit for 2023 before April next year!  

SEP IRAs

Contribution limits for SEPs, or Simplified Employee Pensions, in 2024 is 25% of up to $345,000 of compensation and is limited to a maximum annual contribution of $69,000.

SIMPLE IRAs

The amount you can contribute to a SIMPLE retirement account is increased to $16,000, up from $15,500. The catch-up contribution limit for employees 50 and over who participate in SIMPLE plans remains $3,500 for 2024.

Deductible IRA Phaseouts for 2024

• For singles and heads of household who are covered by a workplace retirement plan, such as a 401(k), and contribute to a traditional IRA, the phaseout range increased to between $77,000 and $87,000, up from between $73,000 and $83,000 in 2023.

• For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $123,000 and $143,000, up from between $116,000 and $136,000. 
• If you contribute to an IRA but are not covered by a workplace retirement plan and are married to someone who is, the phase-out range is increased to between $123,000 and $143,000, up from between $116,000 and $136,000. 

• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.

Expert Tip: You can still contribute to an IRA even if you earn too much – it’s just nondeductible.

Roth IRA Phaseouts for 2024
The income phaseout range for the Roth will increase in 2024. 

• The income phase-out range for taxpayers making contributions to a Roth IRA is increased to between $146,000 and $161,000 for singles and heads of household, up from between $138,000 and $153,000.  
• For married couples filing jointly, the income phase-out range is increased to between $230,000 and $240,000, up from between $218,000 and $228,000.  
• The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.

Saver’s Credit Limits for 2024

For low and moderate income workers, the new Saver’s Credit (also known as the Retirement Savings Contributions Credit) limit is increasing to $76,500 for married couples filing jointly, up from $73,000.

For heads of household, the 2024 limit is $57,375, up from $54,750.

For singles and married couples filing separately, the limit is $38,250, up from $36,500.

Additional Changes Made under SECURE Act 2.0

In its announcement, the IRS included additional changes that come due to the Secure Act 2.0: 

• The limitation on premiums paid with respect to a qualifying longevity annuity contract to $200,000. For 2024, this limitation remains $200,000. 
• Added an adjustment to the deductible limit on charitable distributions. For 2024, this limitation is increased to $105,000, up from $100,000. 
• Added a deductible limit for a one-time election to treat a distribution from an individual retirement account made directly by the trustee to a split-interest entity. For 2024, this limitation is increased to $53,000, up from $50,000.

Have questions about your 401(k) performance? Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors. 

Book a 401(k) Strategy Session

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If you’re wondering if you should stop funding your 401(k) because you’re having a hard time making ends meet or are nervous about the economy, you aren’t alone. 

A 2023 CNBC Your Money Survey finds that “three quarters of working Americans (74%) say they are stressed about their personal finances these days.”¹

As a result, many investors may be thinking of cutting back or ceasing to fund their 401(k)s.

A recent study by Allianz Life Insurance of North America found that American workers are struggling with inflation, and one of the main ways they are “handling” their struggles is by cutting back or halting their 401(k) contributions.

Here are some of the findings:

• 54% halted or reduced their 401k and other retirement savings between July and September.
• Stressed millennials were the most likely to stop or slim their retirement savings due to inflation (65%), followed by Gen Xers (59%) and baby boomers (40%).²

Even though times are tough, now is NOT the time to stop funding your 401(k).

There are many reasons why you should continue to contribute to your 401(k) – even when the market seems worrisome and inflation is pressing in. 

Gains over Time

It is easy to look at the market and worry.

But history has shown that it is wiser to continue contributing to a 401(k) even during a financial crisis. 

For example, at the bottom of the financial crisis of 2008/2009, the S&P 500 was 683 points. Today, it is around 4200 points. 

That’s over 5 times off the lows of 2008/2009. 

I was 41 then, and now I am 55. By not selling in 2008/2009, I was able to continue to significantly grow my retirement savings

If you stopped contributing during the 2008 crisis, you would have missed this huge rally off these lows, and that doesn’t even include your employer match.

Here’s another example: Just 2 years ago, in March of 2020, the S&P 500 fell to 2304 points, but today we are around 4200 points. It is up over 60% off the lows of 2020!

While the past does not always repeat itself, we investors can use it as a guide to make better decisions when faced with the question: Should I pull back or stop funding my 401(k)?

It’s tempting to stop contributing when we feel as if we are facing a financial crisis, but time has proven that it is wiser to keep contributing and trust that there will be gains in the future.

[Related Read: Investing More in Your 401(k) May Help You Beat Inflation]

Social Security Is Not Enough

We have heard for decades that Social Security should not be the only income you have in retirement. 

Social security should be considered your base income, but it will not be enough for you to retire. It just won’t. 

To retire comfortably, you will need to draw off your 401(k) for additional income.

According to the June 2021 National Retirement Risk Index report from The Center for Retirement Research of Boston College: “Half of today’s households will not have enough retirement income to maintain their pre-retirement standard of living, even if they work to age 65 and annuitize all their financial assets, including the receipts from a reverse mortgage on their homes.”³

That’s not a positive outlook for many Americans.

A study by Allianz Life also found that “nearly three in four (72%) [Gen-Xers] worry that if they don’t increase their retirement savings soon, it will be too late to have a comfortable retirement.”⁴

The same study found, “More than four in ten (43%) people say they do not expect to be financially ready for retirement when the time comes. […] Meanwhile, one-third (33%) of Americans expect to live to 100, with an equal third (33%) predicting there is a better than 50% chance they may outlive their savings. At the same time, more than one in three (36%) report that they have not proactively taken any steps to address this concern.”⁵

Since we know that Social Security isn’t enough, we should do all we can to contribute as much as possible to our 401(k)s – not less

The Tax Break Is Worth It

You get a tax break for every dollar that you invest into your 401(k) with pre-tax dollars. 

Let’s say you make $50,000 per year, and you put in 3% of your pay into your 401(k). This is $1,500 and drops your taxable income down to $48,500.

The tax break for contributing to your 401(k) will go away if you stop funding your 401(k). And, come tax time, you may find yourself with a larger tax bill to pay.

Dollar Cost Averaging Is Smart

Follow the dollar cost averaging strategy with your 401(k) from every paycheck. 

This means you invest a sum of money from every paycheck, regardless of the current share prices.

Dollar cost averaging allows you to buy more shares when the market is lower and fewer shares when the market is high. 

Over time, this could accelerate your holdings and your returns.

It also keeps you from making emotional decisions in the moment that you may regret.

Up to 100% Return on Company Match Contributions

Check with your employer to see what your company match is – and do what you can to at least contribute that amount. 

Let’s say they match dollar for dollar up to 3%. 

If you make $50,000 per year, 3% of this is $1,500. 

The employer would then match this $1,500, thus giving you a 100% return on your contributions.

It’s basically free money.

Even if you decide you need to stop contributing as much to your 401(k), make sure you contribute enough to get the company match. 

When It May Make Sense to Stop Funding Your 401(k)

Now that we’ve covered what you need to consider before you stop funding your 401(k), it’s time to discuss when it makes sense not to fund your 401(k).

If you can still manage to contribute and also work toward other financial goals, such as paying off debt, it may make sense to pull back on your contributions. 

For example, if you’re getting the company match and you have a ton of debt, you may want to divert some of it to pay off debt. 

The key here would be to contribute enough to still get the company match and divert additional retirement savings funds to pay off high-interest debt. This is because the company match is essentially free money that your employer contributes to your retirement account based on the amount you contribute. 

If you have high-interest debt, it may not be a bad idea to strike a balance between saving for retirement and paying off debt. 

Create a budget that prioritizes debt repayment while still allowing you to contribute enough to your 401(k) to receive the full company match.

Another time when it may make sense to stop funding your 401(k) is if you are nearing retirement and want to pay off your mortgage.

Paying off a mortgage as you near retirement makes sense only if you have additional funds to make this happen. This is usually your largest payment, and it could drastically increase your income in retirement by paying this off early.

In this case, maybe pull back on funding your 401(k), but do not stop completely.

Have questions about your 401(k) performance? Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors.

Book a 401(k) Strategy Session

SOURCES

1. https://www.cnbc.com/2023/09/07/majority-of-americans-feeling-financially-stressed-and-living-paycheck-to-paycheck-according-to-cnbc-your-money-survey.html
2. https://www.allianzlife.com/about/newsroom/2022-press-releases/inflation-causing-majority-of-americans-to-stop-or-reduce-retirement-savings
3. https://www.newretirement.com/retirement/average-retirement-income-2023-how-do-you-compare/
4. https://www.allianzlife.com/about/newsroom/2022-press-releases/inflation-causing-majority-of-americans-to-stop-or-reduce-retirement-savings
5. https://www.allianzlife.com/about/newsroom/2022-press-releases/inflation-causing-majority-of-americans-to-stop-or-reduce-retirement-savings

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A major factor in achieving your financial goals is being engaged with your finances and investments. This includes your 401(k).

According to CNBC, though 401(k)s are the “most common retirement savings vehicles, 63 percent of Americans don’t understand exactly how it works.”¹

Additionally, when people in the survey were asked common 401(k) investor questions, only 37% could answer confidently.²

If you want to be more engaged with your 401(k), take a minute to read through the most common 401(k) questions our clients ask

#1 What Are My Investment Options?

When you enroll in a 401(k) plan, you should receive a menu of investment options to choose from.

You have the right to choose how your 401(k) contributions are invested within the options on the menu.

You also have a right to make changes to your investment choices.

#2 Can I Change My Investments to Match My Current Needs?

Yes, you have the right to change investments to meet your current needs.

For example, if your risk tolerance changes or the market conditions are different, you may want to change your 401(k) investments to maximize your returns.

This is called rebalancing.

Rebalancing is the process of realigning the holdings of the assets in your portfolio. This can involve periodically buying and/or selling assets in the portfolio in order to maintain the initial desired level of asset allocation.

If you aren’t making changes as needed (or rebalancing), you may run the risk of unmanaged allocations experiencing much larger losses in down markets and miss the opportunity for growth during good markets. 

[Related Read: What Every Investor Needs to Know About Rebalancing a 401(k) ]

#3 How Often Can I Change My Investments to Match My Current Needs?

How often you can change your investments depends on your 401(k) plan.

Some 401(k) plans place a limit on the number of changes you can make per year. Others may charge a fee for making frequent changes to your investments.

Check with HR or your plan administrator to see if there are rules regarding how often you can change your investments.

[Related Read: Is Professional 401(k) Account Management Right for Me? ]

#4 Do Contributions Lower My Taxable Income?

Yes, contributions do lower your taxable income because with a traditional 401(k), you contribute pre-tax income into your 401(k) account.

This means you don’t pay taxes on the contributions when you invest them in the 401(k), but you will be taxed when you do eventually withdraw the money during retirement.

#5 Do I Have a Roth Option?

Some 401(k) plans offer a Roth option, but not all.

With a Roth 401(k), you contribute after-tax dollars into the account, which means you don’t get an immediate tax benefit. However, the withdrawals you make during retirement are tax-free, including both the contributions and any earnings.

Check with HR or your plan administrator to see if the Roth provision is available. 

[Related Read: Pros and Cons of a Roth 401(k): Key Differences and Tax Implications ]

#6 Does My Company Match My Contributions and How Much?

The 401(k) company match is essentially free money and a smart way to maximize your 401(k) retirement income. 

If your company offers a match and how much the company match is depends on the terms of your 401(k) plan. This information should be disclosed to you when you enroll in a 401(k) plan.

Many employers match a percentage of employee contributions, up to a certain portion of the total salary. Others match employee contributions up to a certain dollar amount. 

Contact your plan representative or HR department to find out your company’s match – then strive to contribute at least enough to reach the match amount.

[Related Read: 4 Ways to Potentially Maximize Your 401(k) Company Match ]

#7 What Is the Maximum Annual Contribution?

Employee contribution limits for 401(k), 403(b), most 457 plans, and the federal Thrift Savings Plan are $22,500 for 2023. 

For those ages 50 and older, the 401(k) catch-up contribution is $7,500, for a total maximum contribution of $30,000. 

[Related Read: Big Increases to Retirement Plan Contribution Limits for 2023 ]

#8 How Long Does It Take to Be Vested in My 401(k) Plan?

Vesting means that you own the money in your 401(k).

Any money you personally contribute is always yours – or 100% vested. However, if your employer offers matching contributions, they will use a vesting schedule to determine when this money is actually yours to keep.

This is referred to as the vesting schedule, and it varies from plan to plan. 

And it’s important to know what yours is. Should you change jobs before you are fully vested, depending on the vesting schedule, you may have to return part or all of the money your company matched. 

Your vesting schedule should be clearly spelled out in your plan agreement. If you don’t see it in your info packet, make sure to ask your plan representative or HR department.

[Related Read: Don’t Lose Your Match: The Danger of Ignoring Your 401(k) Vesting Schedule ]

#9 What Are Target Date Funds and Are They Right for Me?

Target date funds, or lifestyle funds, are supposed to automatically adjust account allocations throughout life. 

Investors are grouped solely based on their expected retirement date. This means target date funds do not take into consideration an investor’s…

• Location
• Profession
• Salary
• Risk tolerance
• Retirement goals and objectives 
• Retirement savings history 

Target date funds were created to take away the hassle of having to research mutual funds in your 401(k) and build and construct your own portfolio. They make investing easier. 

But the reality is that target date funds will often underperform in good markets and do a poor job of managing downside risk during down markets.

Target date funds do not take into consideration changes in the economy, tax policy, trade, earning reports, or investment trends – and may not make adjustments for any of these driving factors that affect investment performance.

If these adjustments are not made, you may not stay on course to reach your retirement goals. 

Check out our guide 5 Ways Target Date Funds Fail to Live Up to Their Promise.

#10 How Can I Obtain a Schedule and Explanation of the Plan Management Fees?

Your plan agreement should clearly spell out information regarding your vesting schedule and plan management fees.

If you can’t find it, be sure to ask your plan representative or HR department for copies.

You can also find out your vesting balance and how much you are paying in fees by reading your 401(k) statement.

[Related Read: How to Read a 401(k) Statement and Understand It ]

Where to Get Professional 401(k) Account Management

401(k) Maneuver exists to help employees grow and protect their 401(k) accounts. 

We provide independent, personalized professional account management to help employees, just like you, grow and protect their 401(k) accounts.

And we do this without in-person meetings so you don’t have to drive to an appointment or spend hours preparing for the meeting.

Our done-for-you, virtual service allows you to keep your 401(k) right where it is while we review and rebalance your account as needed based on your risk tolerance and current market conditions. 

All you need to do is to connect your account to our secure platform, and we manage your account for you. There’s no need to move your account – you can keep it right where it is. 

As a fiduciary, we are bound by law to put your interests first. To avoid a conflict of interest, we are fee based. We do not receive commissions on transactions or when we rebalance your account.

Have questions about your 401(k) performance? Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors. 

Book a 401(k) Strategy Session

SOURCES

1. https://www.cnbc.com/2019/03/07/63-percent-of-americans-are-confused-about-401k-retirement-plans.html
2. https://www.cnbc.com/2019/03/07/63-percent-of-americans-are-confused-about-401k-retirement-plans.html

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To achieve retirement savings goals, it is crucial to not only protect your savings, but also ensure they grow at a rate that outpaces inflation.

With inflation eroding our purchasing power and hard-earned money, many investors are wondering what this means for their 401(k)s.

The good news is, a powerful tool that may help you beat inflation is your 401(k).

Inflation Is Up…Again

September PPI data came in higher than expected, as did CPI data earlier this month.

The producer price index, which measures costs for finished goods that producers pay,

increased 0.5% for the month, the Labor Department reported Wednesday.

The consumer price index data for September also saw inflation jump from 2.97% in August to 3.67% in September.

And some might argue that 3.67% is way off compared to what we’re feeling whenever we buy something or get in our cars to go to work.

How 401(k)s May Help Beat Inflation

Traditional savings accounts and low-yield investments often fail to keep pace with inflation, resulting in a loss of purchasing power.

On the other hand, stocks have proven to be the best inflation hedge longer term.

The market has averaged about 9.4% a year since 1928, which greatly exceeds inflation measurements by 4 – 5%.

In fact, when you look at the 17 highest inflation years, the market was up 12 of those years and up double digits in 8 of the 17 years.

In the 5 highest inflation years, the market was up 4 of those years.

One reason is that some percentage of inflation itself is corporations passing along higher costs, which stabilizes their earnings. Ultimately, this has led to some of the strongest bull markets on record.

This is where investing in your 401(k) becomes advantageous – especially if you are rebalancing your portfolio to manage risk and maintain growth.

Failing to regularly rebalance your 401(k) portfolio often results in significant losses during bad markets and opens you up to more risk exposure than you initially intended.

So, adjusting your investments based on market conditions and your risk tolerance may increase your chances of beating inflation.

Taking into consideration the data above – and the fact that inflation erodes the value of your savings and your purchasing power – it’s crucial to continue your 401(k) contributions.

Consistently contributing in times like we’re in right now may help you stay ahead of inflation and maintain the growth trajectory needed to achieve your retirement goals.

Other Reasons to Keep Contributing to Your 401(k) Right Now

Aside from beating inflation, here are a few other reasons continuing to contribute to your 401(k) may benefit you in the short term – and the long run.

Tax Advantages

One key benefit of a 401(k) is the ability to contribute pre-tax income, reducing your taxable income for the year. This means you can invest a greater portion of your earnings, maximizing the growth potential of your account.

Compounding Growth

When you reinvest your earnings, your investments generate returns on both the principal amount and the accumulated gains. Keep contributing, and, over time, compounding can significantly boost your savings and help you outpace inflation.

Diversification Options

Your 401(k) allows you a range of investment options to diversify your portfolio. Spreading your investments across different asset classes may help reduce the risk of being heavily impacted by inflation in any single investment.

In addition, if you select investment options that historically provide returns higher than the inflation rate, you may have a greater chance of beating inflation. Just remember, there are no guarantees.

Employer Match

Keep in mind that employer matching contributions may significantly enhance your ability to beat inflation. If your employer offers the match, take full advantage of it to amplify your retirement savings.

Avoid Fear-Based Decisions

As hard as inflation can be on your wallet, halting 401(k) contributions may not be the best decision – especially if you want to beat inflation.

If you’re fighting the urge to move to cash or to stop contributing altogether consider this:

• Stocks have always been the best inflation hedge longer term. And, this means your 401(k) may be the hedge against inflation you are seeking right now.
  
• Down markets provide an opportunity to accumulate more for your retirement future. So instead of panicking and wanting to move to cash, can you instead view this as the chance for you to increase your portfolio holdings?
• Making fear-based decisions today may hurt your future. Remember, whenever you cut back on your 401(k) contributions, you push back your retirement date.
  
• If you pull back or halt 401(k) contributions, you may miss out on your employee match. This means you are throwing away free money.

Have questions or concerns about your 401(k) performance? Click below to book a complimentary 15-minute call with one of our advisors today.

Book a 401(k) Strategy Session

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It’s common financial advice – save enough in your 401(k) to get the company match.

It’s great advice (after all, who doesn’t want free money?), but it may not be yours to keep should you change jobs or withdraw from your 401(k).

This is because each employer match follows its own vesting schedule.

And, if you don’t pay attention to your company’s vesting schedule, you could do some serious harm to your retirement savings – especially if you’re one of the many Americans switching jobs.

A recent LinkedIn study found that “almost 70% of Gen Z and millennial Americans stated they planned to leave their jobs in 2023.”

If you’re planning to leave your job in the near future, you need to check your vesting schedule.

The reason is simple. If you leave your job before you are fully vested, you may lose out on the employee match you worked so hard for.

The same vesting rules apply if you want to withdraw from your 401(k), which, according to Vanguard, a record number of investors are doing right now.

2.8% of participants took a 401(k) hardship withdrawal in 2022, up from 2.1% in 2021.

And 3.6% of participants took a non-hardship 401(k) withdrawal.

Knowing how your employer’s vesting schedules works is critical for your retirement future.

How 401(k) Vesting Works

Let’s begin by discussing what vesting is.

Vesting means ownership.

The money you put into your 401(k) is yours. You own what you contribute.

It works a little differently for employer matching contributions.

About 81% of companies that offer a 401(k) plan made a matching contribution to workers’ retirement savings in 2021, according to the latest annual survey published by the Plan Sponsor Council of America.

But just because your company offers it doesn’t mean you will see the money anytime soon.

This is because vesting schedules differ from one company to another.

A 401(k) vesting schedule is the length of time you must stay working for your company for matching contributions to be 100% yours.

Sometimes you are immediately vested, which means you own those employer match contributions right away.

But most have different vesting schedules, which determine how much of the employer match you own (or are vested in) by how long you have worked for the company.

Different Types of 401(k) Vesting Schedules

Vesting schedules are employee timelines to determine how long it takes until an employee is fully vested (or owns their matching contributions).

The different types are cliff, graded, or immediate.

Cliff

Cliff vesting is when a company requires you to stay employed with them for a specific amount of time before the money your employer contributed is yours.

Employers have up to 3 years to vest employees in this type of vesting schedule.

You do not own any of the employee matching contributions until you reach this specific point.

Graded

Graded vesting means you vest a certain percentage of your employer’s matching dollars in a set period of time until you are 100% vested.

By law, employers must vest employees at least 20% at the end of 2 years, and another 20% annually each year thereafter.

This means, by the end of year 6 working for your company, you will be 100% vested for the company match.
Immediate

An immediate vesting schedule means you own your employer’s contribution as soon as you receive it in your 401(k) account.

According to a PSCA survey, “More than 44% of 401(k) plans offer immediate full vesting of a company match.”

What Happens When You Aren’t 100% Vested and Leave a Job?

Let’s say your company has a cliff vesting schedule, and you get offered a new job before you have reached the company’s 3-year mark to be vested.

You’d have to forfeit the money your employer contributed. 

Similarly, let’s say your company has a graded vesting schedule, and you leave the company before you are fully vested.

You will owe your company the percentage not vested.

For example, if you leave the company after 4 years and your company has a 6-year vesting schedule, you will own 60% of the amount your employer has contributed if they vested 20% at the end of year 2, 20% year 3, and 20% year 4.

This could be a serious issue for many people.

According to a 2022 research study by Principal Financial Group, “Company 401(k) plan matches are identified as important to reaching retirement goals by 62% of workers.”

If the company match is important to meeting goals, you don’t want to have to give the money back.

While we don’t want to suggest you stay in a terrible job, we do suggest learning your company’s vesting schedule so when you are ready to leave, you can know what you will keep and what you will have to forfeit of your employer matching funds.

401(k) Withdrawals and Your Vesting Schedule

Should you want to cash out your 401(k) – which is not advisable – or withdraw a certain amount, you are only allowed to withdraw amounts that are vested. 

Just like with changing jobs, you can only make withdrawals from 401(k)s that are fully vested.

Take Control of Your Financial Future

401(k) Maneuver provides independent, professional account management to help employees, just like you, grow and protect their 401(k) accounts.

Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that are hurting your retirement account performance. 

We review and rebalance your account for you with the goal in mind of keeping you in what is working and out of what is not. 

With 401(k) Maneuver, you can go about your life doing what you love with confidence, knowing we are managing your 401(k) for you.

See how it works. 

Have questions or concerns about your 401(k) performance? Click
below to book a complimentary 15-minute 401(k) Strategy Session
with one of our advisors today.

Book a 401(k) Strategy Session

SOURCES

1. https://finance.yahoo.com/news/big-quit-close-70-us-120000350.html
2. https://institutional.vanguard.com/content/dam/inst/iig-transformation/has/2023/pdf/has-insights/how-america-saves-report-2023.pdf
3. https://institutional.vanguard.com/content/dam/inst/iig-transformation/has/2023/pdf/has-insights/how-america-saves-report-2023.pdf
4. https://institutional.vanguard.com/content/dam/inst/iig-transformation/has/2023/pdf/has-insights/how-america-saves-report-2023.pdf
5. https://www.cnbc.com/2023/05/26/vesting-schedules-mean-a-401k-match-can-take-years-to-own.html
6. https://www.cnbc.com/2022/04/14/62percent-of-workers-view-employer-401k-match-as-key-way-to-reach-retirement.html

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It feels good to wrap up things nicely before the end of the year, but there’s a lot to do. That’s where having a fourth quarter financial to-do list comes in.

It helps you prioritize the things you need to do to ensure you are in your best financial shape going into 2024 and beyond.

Check these 12 items off your fourth quarter financial to-do list.

#1 Review Where Your Financial Future Stands

According to reports, “Only 30% of U.S. households have a long-term financial plan.”¹

You don’t want to be part of this 30%.

The fourth quarter is a great time to review your retirement investments to see where you stand.

Take time to carefully review your 401(k) statements and other financial statements when they arrive. 

Are you on track with your retirement goals? 

Could you contribute an additional 1-5% of each paycheck in this final quarter to your retirement savings?

Knowing where you stand will help you check off other boxes on your fourth quarter financial to-do list. 

#2 Create a Get-Out-Of-Debt Strategy

According to the New York Fed data recently released, credit card balances saw the largest increase of all debt types – $45 billion – and now stands at a historic $1.03 trillion.²

In May 2023, the average credit card interest rate was 22.16%, according to The Federal Reserve.³

Here’s the thing: Your future planning comes to a halt when you have debt. 

It’s hard to think about the retirement of your dreams when you are struggling to get out of a mountain of debt. 

But that does not mean you should give up! Quite the opposite.

Now’s the time to get honest with yourself about your debt situation. Did you accrue more debt in 2023? 

At the top of your fourth quarter financial to-do list should be a plan to pay off as much debt as you can before the year ends.

Then, think ahead to next year and create a get-out-of-debt strategy. 

#3 Try to Max Out Contributions

While you technically have until Tax Day (Mon, April 15, 2024) to max out your IRA contributions, you should try to do so before the end of the year. 

The IRA contribution limit for 2023 is $6,500, and, if you are 50 and over, you can contribute $7,500.

If you have a 401(k), see if you can contribute up to the contribution limit. 

The 2023 contribution limit for 401(k) plans is $22,500. If you are 50 and over, your contribution limit is a bit higher at $30,000.

Look at where you are so far and see if it is possible to contribute a little bit more out of each paycheck now through the end of the year. 

If you can’t max out the contribution limit for your 401(k), at least find a way to contribute the company match. 

#4 Rebalance Your 401(k)

It’s not just what you save, but what you keep that may have a big impact on future account value and your ability to reach your retirement goals. 

This is why rebalancing is so important and may help boost 401(k) returns – even in a down market.

Not regularly rebalancing has the potential to do real harm over time to your retirement account performance. 

This is because unmanaged allocations may experience much larger losses in down markets and may miss the opportunity for growth during good markets. 

Rebalancing ensures you stay within your risk level and helps to protect against potential losses and stay on course with savings goals. 

#5 Set a Holiday Budget

The fourth quarter includes some of the year’s biggest spending with the holidays.

Take time to set a holiday budget now so you don’t end up with a big credit card balance come January. 

In addition to gifts, budget for holiday travel, entertainment, parties, and meals. 

#6 Use Up Your FSA

Do you have a Flexible Savings Account (FSA)? And does it have to be used up by the end of the year? 

If you have unspent money in your FSA, plan now to use your FSA pre-tax dollars for healthcare purposes.

Schedule doctor appointments and purchase medications so the money doesn’t go to waste. 

#7 Prepare for Open Enrollment

Open enrollment for 2024 health plans begins November 1, 2023, and runs through January 15, 2024.

Coverage takes effect on January 1, 2024.

Don’t wait until the last minute. Take time now to list your current prescriptions and the names of your doctors so you are ready when enrollment begins. 

#8 Update Your Policies

Start the new year fresh and schedule time in the fourth quarter to review and update your essential policies.

When did you last review your insurance policies (car, home, and life)? 

Has anything occurred this year that may help you find better insurance rates?

Is it time to update your home insurance to reflect renovations? 

Did you make lifestyle changes, such as losing weight, that may get you a better quote for life insurance?

This is also the time to look over any accounts with beneficiaries – 401(k)s, IRAs, life insurance policies, investment accounts, and checking and savings accounts – and make updates as needed. 

#9 Take Required Minimum Distributions

Before the Secure Act 2.0 was signed into law December 29, 2022, you had to start taking RMDs by April 1 of the year after you turned 72.

The Secure Act 2.0 extended the start of RMDs beyond age 72.

For those who reached age 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2023, the RMD age is now 73.

However, the IRS has recently made new changes and are delaying the rules to allow companies time to update their systems.

Find out all about it here: IRS Delays Certain RMD Rules: What You Need to Know.

If you’re RMD age, make sure you add this to your fourth quarter financial to-do list; otherwise, you risk serious penalties on the amount not withdrawn.

You don’t want to forget to do this! 

#10 Review Tax Exemptions

Another step on the fourth quarter financial to-do list is reviewing and updating tax exemptions.

This can prove helpful come tax time. Take a look and see if you’re paying too much or too little in taxes.

If you are paying too little, do what you can to prevent owing the IRS for underpayment.

If you are paying too much, keep more each paycheck or take this “extra” and put it in your 401(k) or IRA.

#11 Plan Now for Tax Season

While taxes aren’t due until April 15, 2024, the fourth quarter is a good time to get your tax docs from this year organized. 

The IRS will begin processing tax returns and issuing refunds on January 18, 2024.

This means if you want to get your taxes filed early and get your refund quickly, you need to get everything together in the fourth quarter of 2023.

#12 Speak with a Financial Advisor

One of the most important things on the fourth quarter to-do list should be speaking with a financial advisor.

As you finish out 2023, a financial advisor can help you prepare for tax season and create a plan to better your financial outlook in 2024.

It’s not simply that they can help guide you – financial advisors may help you get closer to your retirement goals than you think. 

It doesn’t matter how far away or close to retirement you are or how much money you’ve saved. 

In fact, recent studies show how Professional Account Management may improve your annual 401(k) account performance by 3% or more.

Take a look below to see the potential of adding 3% more to your 401(k) over time. 

See how much you may have at retirement, and how 3% may improve your 401(k) performance. Check out our retirement calculator.

If you want independent, professional account management to help grow and protect your 401(k), schedule a complimentary 15-minute 401(k) strategy session with one of our advisors.

Book a 401(k) Strategy Session

Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that are hurting your retirement account performance. 

We aim to achieve this goal by first looking at how much equity exposure someone has based on current market and economic trends (risk management). And, second, for the equity allocation, our goal is to be in what is working and out of what is not in terms of investment style.

With 401(k) Maneuver, you can go about your life doing what you love with confidence, knowing we are handling the changes for you. 

With 401(k) Maneuver, there’s no need for FaceTime meetings. 

And you don’t even have to move your account – you can keep it right where it is.

Have questions or concerns about your 401(k) performance? Book a complimentary 15-minute 401(k) strategy session with one of our advisors.

Book a 401(k) Strategy Session

SOURCES

1. https://fortunly.com/statistics/personal-finance-statistics/
2. https://www.newyorkfed.org/newsevents/news/research/2023/20230808#
3. https://www.newyorkfed.org/newsevents/news/research/2023/20230808#

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While data shows more people are saving for the future, others are putting their financial futures at risk by taking 401(k) hardship withdrawals.

401(k) hardship withdrawals should be a last resort, but people are playing fast and loose with their retirement savings, as shown by recent reports from Vanguard, Bank of America, and Fidelity.

According to Bank of America: 

• Roughly 15,950 participants took hardship distributions in the second quarter of 2023, up 36% from 2022. 
• The average participant hardship amount is $5,050.¹

Vanguard’s How America Saves 2023 Report claims, “In 2021, overall hardship withdrawal activity reverted to pre-pandemic levels from 2019, and in 2022, hardship withdrawal activity increased to a new high.”² 

Vanguard reports that 2.8% of participants took a 401(k) hardship withdrawal in 2022, up from 2.1% in 2021.³

Additionally, Vanguard reports that 3.6% of participants took a non-hardship 401(k) withdrawal.⁴

The ability to take a withdrawal from your 401(k) plan may seem appealing – especially if you are facing a financial emergency. 

However, a 401(k) hardship withdrawal may cost you more than you think. 

401(k) Hardship Withdrawals Qualifications

In order to withdraw from your 401(k), you must be at least 59½ to avoid paying an early withdrawal penalty.

That is unless you qualify for a hardship withdrawal.

The IRS explains, “A hardship distribution is a withdrawal from a participant’s elective deferral account made because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need. The money is taxed to the participant and is not paid back to the borrower’s account.”⁵

However, not just anyone qualifies for a 401(k) hardship withdrawal.

First, your individual 401(k) plan must allow for it, which is likely as Vanguard reports that 95% of plans offer hardship withdrawals.⁶

Next, you must prove you have a financial need that is considered “an immediate and heavy financial need” for any of the following: 

• Medical care expenses for the employee, the employee’s spouse, dependents or beneficiary.

• Costs directly related to the purchase of an employee’s principal residence (excluding mortgage payments).
• Tuition, related educational fees, and room and board expenses for the next 12 months of postsecondary education for the employee or the employee’s spouse, children, dependents, or beneficiary.
• Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence.
• Funeral expenses for the employee, the employee’s spouse, children, dependents, or beneficiary.
• Certain expenses to repair damage to the employee’s principal residence.⁷

Now that most plans offer hardship withdrawal as an option, it may seem like an easier way to alleviate financial stress.

Given that many Americans are strained financially, it is not too surprising to see an increase in these 401(k) hardship withdrawals.

According to Vanguard, “In 2022, 36% of hardship withdrawals were used to avoid a home foreclosure or eviction, up from 31% of withdrawals in 2021. The second most common reason was medical expenses, as 1 in 3 hardship withdrawals were initiated for this purpose, in line with 2021.”⁸

The Difference between a 401(k) Loan and a 401(k) Hardship Withdrawal

It’s important to note that we’ve been discussing 401(k) hardship withdrawals and not 401(k) loans.

Both allow plan participants to withdraw money from their 401(k)s, but they work very differently.

A 401(k) loan is meant to be paid back, whereas a 401(k) hardship withdrawal is simply withdrawing money from your retirement savings. And since you are withdrawing money from your retirement savings, you will be taxed on the money withdrawn and face possible penalties. 

In contrast, a 401(k) loan essentially allows participants to borrow from themselves and then pay themselves back with interest, without having to pay penalties or taxes on the amount borrowed as long as it is paid back on time.

While a 401(k) loan might sound like a better way to get the money you need, investors should not rush to take a loan.  

There are downsides that – if you aren’t aware of upfront – could cost you way more than you planned. 

[Related Read: The Downside of 401(k) Loans: Investors Beware]

The Immediate Cost of a 401(k) Hardship Withdrawal

When facing mounting medical bills or possible foreclosure, it’s tempting to seek a 401(k) hardship withdrawal.

But this money is not actually available immediately.

It can take weeks for the money to leave your 401(k).

If you need cash immediately, a 401(k) hardship withdrawal may not help you. 

It’s also important to understand that, unlike 401(k) loans, you must pay taxes on the amount withdrawn from your 401(k).

Let’s say you take a 401(k) hardship withdrawal because you are cash-strapped, but because of the tax implications, you wind up paying more in the end. 

Moreover, if you take an early 401(k) withdrawal that does not qualify as a “hardship withdrawal,” you may have to pay penalties in addition to taxes. 

The Future Cost of a 401(k) Hardship Withdrawal

In addition to having to pay taxes and possible penalties in the immediate future, there are costs down the road.

When you withdraw money from your savings, you are left with less savings.

A 401(k) withdrawal is not a loan. You are not paying it back. You are simply taking money away from your retirement.

According to the Center for Retirement Research at Boston College, early withdrawals reduce overall 401(k) assets for retirement by 25% on average.⁹

In addition to paying taxes and possible penalties on the amount, you are also losing out on the power of compound returns.

Research conducted by Employee Benefit Adviser shows, “A hypothetical 30-year-old participant who cashes out a 401(k) savings balance of $5,000 today would forfeit up to $52,000 in earnings the sum would have accrued for them by age 65, if we assume the account would have grown by 7% per annum.”¹⁰

That’s a lot of money you’ll miss out on come retirement. 

A 401(k) Hardship Withdrawal Should Be a Last Resort

If you are desperate for money, a 401(k) hardship withdrawal should still be your last resort. 

Don’t put your retirement savings at risk.

Instead, consider one of these alternatives:

• Use HSA savings to cover medical expenses.
• Consider financing specifically designed for medical needs, such as CareCredit.
• Tap into other savings accounts, such as emergency savings.
• Apply for a 0% credit card, pay with it, and then pay it off interest-free before the promotional period ends.
• Take out a personal loan.
• Use your home equity line of credit.
• Ask a family member for a loan. 

Before you make any major financial decisions, especially those involving your retirement savings, it is important to speak with a financial advisor.

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SOURCES

1. https://business.bofa.com/content/dam/flagship/workplace-benefits/id20_0905/documents/Participant-Pulse.pdf
2. https://institutional.vanguard.com/content/dam/inst/iig-transformation/has/2023/pdf/has-insights/how-america-saves-report-2023.pdf
3. https://institutional.vanguard.com/content/dam/inst/iig-transformation/has/2023/pdf/has-insights/how-america-saves-report-2023.pdf
4. https://institutional.vanguard.com/content/dam/inst/iig-transformation/has/2023/pdf/has-insights/how-america-saves-report-2023.pdf
5. https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans
6. https://institutional.vanguard.com/content/dam/inst/iig-transformation/has/2023/pdf/has-insights/how-america-saves-report-2023.pdf
7. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributions
8. https://institutional.vanguard.com/content/dam/inst/iig-transformation/has/2023/pdf/has-insights/how-america-saves-report-2023.pdf
9. http://crr.bc.edu/wp-content/uploads/2015/01/IB_15-2.pdf
10. https://www.benefitnews.com/advisers/opinion/to-show-participants-you-care-help-them-avoid-401k-cash-outs

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