A Sophisticated  Approach to Financial Services

As we approach the final quarter, it’s time to talk about financial risks that could significantly cost you. Let’s say you’ve made a financial goal for 2024. If you aren’t paying attention, you may miss that goal because you have to pay more in taxes than expected. Or you may be really close to having a fully funded emergency fund just to blow it on holiday shopping. Then again, there are also financially wise opportunities you may simply miss out on, such as employee benefits like health savings account funds. Review these potential 5 financial risks and make sure you are in a better position come the end of the year.

#1 Review and Adjust Your Tax Strategy

Planning now may prevent a surprise tax bill and help potentially lower your tax bill in April 2025. If you have withdrawn from your 401(k) and are 59½ and younger, you may be penalized and taxed 20% on the withdrawals. In addition to 401(k) tax implications, you should also make sure you have a strategy for your taxes. Meeting with your CPA now can help you optimize your tax strategy before the year ends. Your CPA can advise you if you need to adjust your withholdings, maximize deductions, or make charitable contributions to reduce your tax burden.

#2 Plan Now for Your Holiday Shopping Budget

Christmas – and all its financial risks – will be here before you know it. In 2023, “A little over a third (34%) of Americans went into debt [during the] holiday season.”¹ The average debt for holiday spending in 2023 was $1,028.² However, in 2022, Americans took on an average of $1,549.³ While Americans spent less in 2023, they still took on debt. And it will happen again this year. According to Salsify’s “2024 Holiday Consumer Research” report, “ 65% of shoppers plan to spend “about the same” as they did in 2023. Just 21% plan to spend less and 15% will likely spend more.”⁴ Where you fall on the holiday financial risk scale is up to you… Will you spend less, the same, or more this holiday season? The best way to prepare for holiday shopping is to create a holiday budget NOW. Do not wait until Black Friday. Don’t wait until early December. Take a serious look at your financial situation today and create a realistic budget based on what you currently have for holiday shopping and what you can save between now and then. And don’t forget to budget not only for gift shopping, but also for holiday travel, décor, and events. If you know you are only budgeting for $100 per family member, you will avoid overspending when the sales hit. If you know you won’t have enough time to save up for several holiday outings, go ahead and make plans for the events that you can afford.

#3 Review and Maximize Employee Benefits

As year-end approaches, review your employee benefits, especially if your company has an open enrollment period. Let’s look at a few examples. Boost your 401(k) contributions. If you aren’t already getting the company match, start contributing enough to receive it. Keep in mind that you get a tax break for every dollar that you invest into your 401(k) with pre-tax dollars. For example, if you make $50k per year and contribute 3% of your pay into your 401(k), it equals a $1,500 investment. In turn, this $1,500 drops your taxable income down to $48,500. Utilize your health savings account while you can benefit from pre-tax savings on qualified medical expenses. Take time to look into other employee benefits that can help you with financial risks. For example, some employers offer discounted prescription medications as a benefit that may not be covered by health insurance. Some employers offer company products or service discounts. Sometimes, these may even include services you are already paying for (such as streaming services). Many companies now offer wellness benefits, such as gym memberships and mental health coverage. Taking full advantage of these employee benefits can improve your overall financial picture.

#4 Plan for the Unknown

Living without emergency savings is one of the most common financial risks. Yet, over 1 in 5 Americans have no emergency savings at all.⁵ And those who do have emergency savings don’t have enough. According to the 2024 Empower “Emergency Savings” study, “Nearly 2 in 5 (37%) couldn’t afford an emergency expense over $400. […] Americans have accumulated a median emergency savings of just $600. Baby Boomers and Gen Xers have put aside the most for the unforeseen with median savings of $1,000 and $868, respectively, and Millennials and Gen Zers the least with median savings of $500 and $200, respectively. The median savings for men sits at $1,000 — twice as much as the median savings for women.” ⁶ Emergencies happen. Where will that money come from if you aren’t prepared to cover the cost of an emergency? Experts suggest saving enough money to cover three to six months of expenses. How close are you to this size emergency fund? Make it a goal to build up your emergency fund before the year ends. Adjust your budget to accommodate the amount you need to get your emergency fund closer to your goal. If you lose your job, get sick, or need a new roof, having this cushion will help you handle whatever comes your way without impacting your financial stability.

#5 Get Professional Help to Prepare for Year-End Investment Moves

One of the best ways to avoid financial risks as the year ends is to seek professional help. It’s far better to get help before you really need it than to wait until the end of the year and receive a surprisingly large tax bill. [Related Read: How Professional 401(k) Management May Help Account Performance ] A proactive approach (rather than a reactive approach) allows you to avoid financial risks or losses and take advantage of market opportunities. For example, get help reviewing your investment portfolio. A qualified financial advisor will suggest adjustments, including rebalancing your portfolio, selling underperforming assets, or making contributions to retirement accounts to maximize tax benefits. Your advisor will consider the big picture and advise you on your course of action as you approach the end of the year. 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. With 401(k) Maneuver, you can wrap up the year and start a new one with confidence, knowing we are managing your 401(k) for you.

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 Strategy Session

Sources

1. https://www.lendingtree.com/credit-cards/study/average-holiday-debt/
2. https://www.lendingtree.com/credit-cards/study/average-holiday-debt/
3. https://www.lendingtree.com/credit-cards/study/average-holiday-debt/
4. https://www.salsify.com/blog/consumer-spending-trends-holiday-shopper-spend-predictions
5. https://www.empower.com/the-currency/money/over-1-in-5-americans-have-no-emergency-savings-research
6. https://www.empower.com/the-currency/money/over-1-in-5-americans-have-no-emergency-savings-research

Americans are not saving enough for retirement.

In a report entitled Americans Face Alarming Retirement Savings Shortfall, the National Institute for Retirement Security shares, “Most Americans will not have enough money for a financially secure retirement. […] NIRS research found that for Generation X, a generation that is quickly approaching retirement and the first that will retire largely without pensions, the bottom half of earners have only a few thousand dollars saved for retirement. This means the vast majority of Gen Xers are not even close to having enough savings to retire. And when Americans don’t have adequate retirement income, they are more likely to fall into poverty or turn to public assistance programs or families to make ends meet.”¹

This is a major problem.

Even if you have saved enough money for retirement, it’s a guarantee that you know someone else who has not.

There are many reasons why Americans are not saving enough for retirement.

Take some time to read about the reasons so many are not saving enough for retirement and consider how they can improve their situation.

If there is someone in your life who does not seem to be saving enough for retirement, we encourage you to show compassion and share these tips with them. 

Social Security Is Not Enough for Retirement

Many Americans believe they can rely on Social Security during their retirement years.

Unfortunately, Social Security does not provide enough money for most Americans to live comfortably during retirement.

The average retired worker’s monthly Social Security benefits in 2024 is $1,827. For couples receiving Social Security benefits, it’s $2,972.

While this is certainly better than nothing, it is not enough for retirement, given inflation and rising medical costs.

Experts suggest the cost of retirement is 80% of your pre-retirement income.

Let’s say a couple earns $120,000 annually. If you follow the 80% rule, they should expect to earn $96,000 annually, which equates to $8,000 a month.

$8,000 a month is significantly more than the $2,972 they can anticipate receiving from Social Security. 

The couple would need an additional $5,000 to reach 80% of their pre-retirement income.

The truth is, Social Security is NOT designed to cover the bulk of your pre-retirement income.

According to the Social Security Administration, “For someone with average earnings who retires in 2024 at age 65, Social Security benefits replace about 39 percent of past earnings.”²

However, reports have found that 40% of older Americans rely solely on Social Security for retirement income.³

Pensions Are a Thing of the Past

It is no longer common for employers to offer pension plans to their employees.

According to a congressional report, “Between 1975 and 2019, the number of people actively participating in private-sector pension plans dwindled from 27 million to fewer than 13 million.”⁴

Pensions typically provide a guaranteed monthly benefit check to retirees.

Today, more employers offer 401(k) plans, which require employees to save up for their own retirement.

David John, a senior strategic policy adviser at the AARP Public Policy Institute, explains, “The beauty of traditional pensions is that I work, I don’t really have to deal with any investment returns… and then I retire, and I get essentially a retirement paycheck on top of my Social Security. [With a 401(k)], you have to make a decision at the end of your working life: ‘What am I going to do with this money?’ And that is a complex and confusing decision that one has to make.”⁵

401(k) Knowledge Is Weak

With Social Security not providing enough and pensions being almost nonexistent, it means Americans must utilize 401(k) plans to save for retirement.

However, 63% of Americans don’t understand how a 401(k) plan works.⁶

This is a major problem!

If the bulk of your money is in a plan that you don’t understand, chances are, you may be behind on retirement savings. 

If you’re contributing money to a 401(k), you need to know how the plan works so you can get the most out of it.

[Related Read: 6 Questions Every 401(k) Investor Needs to Ask ASAP]

Americans Lack Financial Literacy

It’s not just a lack of understanding of 401(k) plans; it’s also a general lack of financial literacy.

Generally, financial literacy is not taught in schools.

Without a solid financial education, Americans grow up without enough knowledge to save adequately for retirement.

As a result of lower financial literacy, older Americans may make poor financial decisions.

How to Better Prepare to Retire Comfortably

Now that we know the reasons why Americans are not saving enough for retirement, let’s look at some ways they can turn things around. 

• Begin financial planning. Review your current savings and consider your future needs.
• Plan within Your Means. Take a realistic approach to retirement saving. Rather than attempting to save for a retirement that is out of reach, plan within your means. Calculate how much you expect to receive from social security. Then, figure out how much more you’ll need to retire safely.
• Take Advantage of Company Matching. While you have access to an employer-sponsored 401(k) plan with company matching, take advantage of matching contributions. Make it your goal to always contribute at least enough to receive this free money.
• Boost Contributions. Knowing the high cost of retirement, make every effort to boost your contributions. For those closer to retirement age, take advantage of catch-up contributions.
• Wait to Retire. The longer you wait to withdraw social security, the better. The Social Security Administration explains, “The age you stop working can affect the amount of your Social Security retirement benefits. We base your retirement benefit on your highest 35 years of earnings and the age you start receiving benefits.” 

You should also wait to withdraw from your 401(k). Even if you are tempted to take an early withdrawal, wait it out. This will help you avoid penalties.

• Continue to Learn. It’s never too late to learn. Just as you are reading this article explaining why some Americans are not saving enough for retirement, you should read other financial articles. Subscribe to newsletters. Watch YouTube videos. Listen to podcasts.
  
• Speak to a Professional. Even if you have basic investment knowledge, speaking to an expert may change the performance of your account from good to great…and potentially boost retirement savings.

If you have questions about your 401(k) or if you need help, we’re here for you. Click below to book a complimentary 15-minute 401(k) Strategy Session.

Book a Call

SOURCES

1. https://www.nirsonline.org/2024/02/americans-face-alarming-retirement-savings-shortfall-according-to-national-institute-on-retirement-security-testimony-before-u-s-senate-committee/
2. https://www.cbpp.org/research/social-security/top-ten-facts-about-social-security#:~:text=About%2067%20million%20people%2C%20or,young%20survivors%20of%20deceased%20workers.
3. https://www.nirsonline.org/2020/01/new-report-40-of-older-americans-rely-solely-on-social-security-for-retirement-income/
4. https://www.usatoday.com/story/money/2024/03/19/pensions-are-popular-why-dont-more-americans-have-them/72968970007/
5. https://www.usatoday.com/story/money/2024/03/19/pensions-are-popular-why-dont-more-americans-have-them/72968970007/
6. https://www.cnbc.com/2019/03/07/63-percent-of-americans-are-confused-about-401k-retirement-plans.html

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In the ever-evolving landscape of data security, the recent and alarming cyber crisis has left millions of Americans reeling. 

This particular data breach included PII (personal identifiable information), including Social Security numbers of almost 3 billion people.

In response to this data breach, New York Rep. Ritchie Torres said: “When it comes to cyberspace, there is no law and order, only lawlessness and disorder. We live in a cyber world, where your most sensitive data can be collected without your knowledge or consent by a private company and then stolen by a cybercriminal, leaving you wide open to identity theft. It is fair to say that cyberspace is the most lawless place on earth.”¹

Cybercriminals are savvy – we need to be smarter.

Read on to learn how to handle this latest data breach and protect yourself from the next one.

The Latest Data Breach: Here’s What Happened

National Public Data, a data broker company providing background check services, announced in August 2024 that it had experienced a massive data breach.

This data breach included leaking the Social Security numbers of almost every American (or 2.9 billion records) and full names, dates of birth, phone numbers, and addresses.

The breach was a hack by the cybercriminal organization USDoD, which attempted to sell all this PII data on a dark web forum.

How to Find Out If Your Info Was Leaked

There are several ways to determine if your PII has been compromised.

• Have I Been Pwned – This is a free website that has been around for some time and allows users to enter their email addresses to see if they have been involved in any data breaches.
• npdbreach.com—This website was created specifically for this data breach and does not store searches. It allows users to search by name, zip code, SSN, or telephone number.
• npd.pentester.com – This website was created by the cybersecurity firm Pentester, which allows users to search by name, state, and birth year to see if they were affected by this particular data breach.

What to Do If Your PII Was Leaked

If you discover that your PII was part of the 2024 National Public Data breach, there are steps to take to protect yourself from becoming a victim of identity theft.

• Sign up for fraud alerts. It is free and easy to sign up for free fraud alerts. Contact one of the three credit bureaus.
• • Equifax: Call 1.800.685.1111 or visit its website.
  • Experian: Call 1.888.397.3742 or visit its website.
  • TransUnion: Call 1.888.909.8872 or visit its website.
    
• Get a credit report. Call 1.877.322.8228 or visit www.annualcreditreport.com to obtain a free credit report from the three major credit reporting agencies.
  
• Monitor financial accounts. Keep a close watch on your financial accounts.
• Contact financial institutions if you notice anything. If you notice anything suspicious, contact your financial institutions immediately.
• Freeze your credit. Freezing your credit limits access to your credit report, which makes it difficult for anyone to open new accounts in your name. According to CBS News, “Security experts are advising all Americans to take a few minutes to complete what they deem an essential step in protecting one’s credit files in a day and age when cybersecurity breaches are becoming increasingly common.”² It’s easy to freeze your account, and some experts believe you should always have your credit frozen and unfreeze it as needed.
• Utilize Social Security Administration’s Block Electronic Access Service Tool. This is a unique tool designed to protect against identity theft. According to the Social Security Administration, the eServices block “prevents anyone, including you, from seeing or changing your personal information online. Once [the SSA] adds the block, you or your representative will need to contact your local office to request its removal.”³

What to Do If You Are the Victim of Identity Theft

If you believe your PII has been stolen and you are a victim of identity theft, these are the steps you need to take. 

• Report It to the FTC. Start by reporting the identity theft to the Federal Trade Commission at identitytheft.gov using the online form. They will send you a personal recovery plan that details what you need to do to recover your identity.
• File a police report. File a police report locally and keep a copy for your records.
• Contact the IRS. Contact the Internal Revenue Service to prevent a thief from using your SSN to file a tax return and receive your refund.
• Contact the SSA. Reach out to the Social Security Administration to have them review your statements.

Steps to Take to Protect Yourself

Even if you were not affected by this massive data breach, you should still take steps to protect your identity online.

Use these steps to keep your PII safe.

• Use strong passwords. Experts recommend using lengthy password phrases comprised of multiple words and numbers that would be difficult for hackers to guess.
• Use multi-factor authentication. When accessing any site that includes PII (personally identifiable information), use multi-factor authentication. This requires the user to submit a password and gain access via an additional code sent via text message or email.
• Beware of scammers. Unfortunately, in light of a data breach this large, there will be scammers. Scammers may have enough PII to convince you that they are legitimate representatives of the Social Security Administration or a financial institution. Do not click on any links or give out information over the phone. Contact your institution directly.
• Set up a My Social Security account. Create a my Social Security account even if you are not receiving benefits. This will allow you to see future benefits estimates if you aren’t receiving benefits yet. If you are receiving benefits, you can use my Social Security to add blocks preventing anyone from viewing and changing personal information online and blocking direct deposits.
• Sign up for security alerts. Sign up for security alerts with your bank and credit card company.
  
• Monitor accounts. You must stay aware of what is happening with your financial accounts (bank accounts, credit card accounts, and retirement accounts). It’s imperative that you register for online accounts and monitor them regularly. The sooner you recognize discrepancies, the better.

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

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Sources

1. https://www.cbsnews.com/newyork/news/social-security-breach-what-to-do-ritchie-torres/
2. https://www.cbsnews.com/news/how-to-freeze-your-credit/
3. https://www.ssa.gov/fraud/

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Given the increase in the cost of retirement, it’s no wonder many are worried they are behind on 401(k) savings.
According to the Northwestern Mutual 2024 Planning & Progress Study, “American adults say on average they now need $1.46 million to retire. That’s 15% higher than a year earlier and a 50% increase since 2020.”¹
If you are one of the many Americans who feel as if you are behind on 401(k) savings, there are ways you can catch up.
Follow these tips to boost your 401(k) savings and prepare to retire more comfortably.

#1 Increase Contributions

The most obvious way to boost 401(k) savings is to increase how much you contribute.

If your 401(k) account is still set up just as it was when you were first employed, it’s time to make changes.

Begin by increasing the percentage of your paycheck you contribute each month.

Financial advisors will tell you that it is a no-brainer to contribute at least enough to receive the company match.

That’s because it’s free money.

Let’s say your employer matches 100% up to 6% of your pay.

If you make $40,000 a year and contribute $2,400 (or 6%) for the year, your employer will match this 100%.

This means you would get $2,400 of free money.

But contributing just enough to get the company match isn’t enough.

While contributing something is better than nothing, $2,400 isn’t going to get you far if you are behind on 401(k) savings.

Ideally, you should aim to contribute the maximum amount allowed.

The employee 401(k) contribution limits for 2024 have increased to $23,000. 

For those 50 and older, you should also take advantage of catch-up contributions, which allow you to contribute more than $23,000.

Catch-up contributions are designed specifically for those who are behind on 401(k) savings. 

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

[Related Read: Big Catch-Up Contribution Changes Coming in 2024]

#2 Earn More Money

If you are behind on your 401(k) savings, you need to do whatever you can to earn more money for retirement.

Even if this means you need to take on a side hustle or a second job.

Take advantage of the gig economy and earn money for doing simple tasks for other people when you aren’t working at your full-time job.

Find another way to earn money, and then, take all the extra money you earn and put it into your 401(k) account.

[Related Read: Close the Gap on Financial Goals with a Side Hustle]

#3 Get Healthy Now

Healthcare is one of the most expensive parts of retirement – and healthcare costs are rising.

According to the Fidelity Retiree Health Care Cost Estimate, “A single person age 65 in 2023 may need approximately $157,500 saved (after tax) to cover health care expenses in retirement. An average retired couple age 65 in 2023 may need approximately $315,000 saved.”²

Fidelity also claims that “the average age 65-year-old couple today will spend around $12,000 on healthcare in their first year of retirement.”³

Given the rising costs of healthcare, it is imperative to get healthy now.

The cold hard truth is that the less healthy you are, the more expensive your healthcare will be in retirement.

PBS News reports, “Obesity is an expensive disease, especially for aging seniors. One study found that while obese 70-year-olds live as long as healthy weight 70-year-olds, they will spend $39,000 more on health care.”⁴

If you are making unhealthy choices today, you will literally pay for them tomorrow.

Change your habits and embrace a healthier lifestyle.

Exercise regularly to reduce the chances of heart disease and stroke.

Take advantage of your employer-sponsored healthcare insurance plan, which should include regular physicals and preventative care options.

#4 Cut Expenses

What you spend money on today will affect your retirement savings tomorrow.

Think of it this way: If you spend less, you can save more.

If you know you are behind on 401(k) savings, it’s time to take a good hard look at your expenses. 

Are there places where you are spending more than you need?

Consider cutting these expenses:

• Subscription services – Do you need multiple ones?
• Clothing – Do you have more than you need?
• Gifts – Do you overspend when giving to others?
• Vacations – Can you take less expensive vacations?
• Food and drink – Can you reduce how often you eat out to save money?
• Entertainment – Are you willing to utilize free community events and library services?
• Utilities – What are some ways you can lower energy and water costs?
• Home repairs and landscaping services – Can you do it yourself or negotiate for better rates?

Wherever you cut back, make sure you are placing the saved money toward your 401(k).

#5 Seek Professional Help

There is no shame in getting help if you are behind on 401(k) savings.

And you’ve come to the right place!

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. 

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.

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 Strategy Session

Sources

1. https://www.forbes.com/sites/bobcarlson/2024/05/24/how-much-money-do-you-really-need-to-retire-comfortably/
2. https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
3. https://communications.fidelity.com/wi/tools/retirement-health-care/
4. https://www.pbs.org/newshour/show/extra-costs-extra-weight-older-adults

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Early 401(k) withdrawals are soaring.

According to the Vanguard Group, “A record-breaking number of Americans are making emergency withdrawals from their 401(k) retirement plans in order to cover a financial hardship amid the ongoing inflation crisis.”¹

Approximately 3.6% of workers participating in employer-sponsored 401(k) plans made early 401(k) withdrawals in 2023, higher than the 2.8% in 2022.²

The report found that “about 40% of individuals who dipped into their 401(k) last year did so to avoid foreclosure — up from about 36% in 2022.”³

While early 401(k) withdrawals may solve the problem today, they may create bigger problems in the future.

For example, a Capitalize survey found that “early withdrawals from 401(k) retirement funds cost Americans $6.12 billion in penalties” in 2023.⁴

Keep reading to see why early 401(k) withdrawals may hurt your financial future and how to avoid pulling funds from your 401(k) before retirement.

Why Early 401(k) Withdrawals May Hurt Your Retirement

To withdraw funds from your 401(k) without facing penalties, the IRS says you need to be 59½ years old.

If not, you will be hit with a 10% penalty. This is on top of the 20% automatic withholding for taxes.

Not only do penalties hurt you, but withdrawing early means you miss out on potential growth.

When you contribute to a 401(k), your money earns interest, which compounds over time – meaning you earn returns on your returns. 

The longer your money is invested, the more it can grow. 

Should you pull from your 401(k) early, you risk missing out on that compounding effect and potential growth. 

This can have a significant impact on your retirement savings over time.

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.”⁵

Early withdrawals may also put your financial future at risk.

According to the Center for Retirement Research at Boston College, early withdrawals reduce overall 401(k) assets for retirement by 25% on average.⁶

Retirement is getting increasingly expensive.

You will need every penny you have saved to ensure you live well in your retirement years.

While it may be a quick fix today, you could be doing incredible harm to yourself in the future.

Common Reasons for Early Withdrawals and How to Avoid Them

Financial pressure often leads people to take early 401(k) 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.”⁷

When the bills are piling up, it is tempting to take from your retirement savings for tomorrow to cover costs today.

The best way to protect yourself and your finances is to build up a solid emergency savings fund.

When financial emergencies occur, you have a safety net.

When it comes to medical expenses, make wise decisions regarding insurance before something happens or someone receives a diagnosis.

If you dip into your retirement savings every time you have debt, you will find yourself in a vicious cycle.

Instead, when tempted to use your 401(k) to pay down debt, strive to follow a debt repayment model that involves spending less.

It’s becoming wise to have multiple income sources.

This will prove helpful should you find yourself unemployed.

Look for investment opportunities and other income streams, such as side hustles.

Strategies to Safeguard Your 401(k) from Early Withdrawals

It’s one thing to tell you not to take an early 401(k) withdrawal. 

You also need to know how to avoid being in a position where it’s a necessity to withdraw the money.

• Automate Savings to Avoid Temptation: Prioritize saving for retirement. It is way too easy to put off saving because retirement seems so far off. Don’t make this mistake! Automate your 401(k) savings and leave it alone.
  

• Create a Realistic Budget and Stick to It: Inflation is certainly hurting people, but it’s not the only reason they’re finding themselves in financial trouble. Some people overspend, whether on a too-high mortgage or too much spending. Avoid overspending by creating a realistic budget that factors in both saving for retirement and saving for emergencies.
  

• Build a Solid Emergency Fund: A common reason people take early withdrawals is that they face unexpected expenses, such as medical bills, relocation, or job changes. The best way to prepare for unexpected expenses is to build up an emergency fund. Factor emergency savings into your budget and have your bank take a portion of each paycheck and put it into a separate savings account.
  

Seek Financial Guidance from a Professional: There is no shame in asking for help. Before you take an early 401(k) withdrawal, speak with a financial advisor who can provide advice on how to turn your financial situation around without significantly harming your retirement savings.

Penalty-Free 401(k) Withdrawal Options When All Else Fails

In a few circumstances, the 10% early withdrawal penalty can be waived.

This is known as a 401(k) hardship withdrawal.

A hardship withdrawal is a withdrawal of funds from a retirement plan due to “an immediate and heavy financial need,” and, if you qualify, you usually don’t have to pay the penalty. 

Situations that qualify for a hardship withdrawal: 

• Medical bills for you, spouse, and dependents 
• Money to buy a house
• Money to avoid foreclosure or eviction 
• College expenses for you, spouse, or dependents 
• Funeral expenses 
• Disability 
• Adoption purposes
• Disaster 
• Military reservist 

To qualify, you must prove you can’t get the money anywhere else, such as a loan or other savings account.

The administrator of the 401k will have to approve a 401(k) hardship withdrawal.

However, you will still have to pay 20% taxes, which is taxed as ordinary income even if you qualify for a hardship withdrawal.

[Related Read: The Real Impact of 401(k) Hardship Withdrawals]

Another option is a 401(k) loan.

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

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

You will face hefty penalties if you fail to pay the 401(k) loan back on time.

Ultimately, a hardship withdrawal or a 401(k) loan should be treated as a last resort.

Do what you can to avoid treating your 401(k) like your personal bank account.

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 Call

Sources:

1. 1. https://www.foxbusiness.com/economy/401k-hardship-withdrawals-surge-another-record-high-inflation-stings
   2. https://www.foxbusiness.com/economy/401k-hardship-withdrawals-surge-another-record-high-inflation-stings
   3. https://www.foxbusiness.com/economy/401k-hardship-withdrawals-surge-another-record-high-inflation-stings
   4. https://www.foxbusiness.com/personal-finance/early-withdrawal-surge-2023
   5. https://www.benefitnews.com/advisers/opinion/to-show-participants-you-care-help-them-avoid-401k-cash-outs
   6. http://crr.bc.edu/wp-content/uploads/2015/01/IB_15-2.pdf

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It is natural for a parent to want to help their children financially, but helping kids financially isn’t always the best decision.

You may end up hurting them more than helping them – especially if you dip into your retirement savings.

While it is understandable to want to help, the amount of financial help adult children receive from their parents is alarming.

Consider these statistics.

• 47% of parents with a child older than 18 provide them with at least some financial support. These parents are shelling out $1,384 a month, on average.¹
• 61% of adult children still living at home don’t contribute to household expenses at all.²
• 58% of parents said they have sacrificed their own financial security for the sake of their adult children, a jump from 37% of parents a year earlier.³
• More than half (57%) of those in the 18-to-24 age group said they were still living with a parent, as did 21% of those ages 25 to 29 and 11% of those between the ages of 30 and 34.⁴
• Among parents who said they helped their adult children financially in the past year, 36% said it hurt their finances “at least some,” especially among parents with lower incomes.⁵
• More than 3 in 5 (61%) parents/guardians of children age 18 or older are currently sacrificing, or have sacrificed, financially to assist their adult children.⁶
• Parents of adult children also say they are sacrificing, or have sacrificed, their retirement savings (37%).⁷

Given the state of the world, it’s easy to understand why parents feel as if they need to help their children financially.

The rising cost of living and inflation have put many adults in dire financial situations.

However, helping kids financially may not be the right answer.

Read on to see why.

The Problem with Putting Your Kids First

Many parents prioritize their children’s financial needs over their own.

For example, some parents pay for college instead of saving for retirement.

Some dip into their 401(k)s to help their adult children with a down payment for a house.

Which may turn into a problem down the road.

Saving for your future retirement should be a priority as the cost of healthcare alone is making retirement years difficult for many.

If parents don’t prioritize their financial future because they are helping their children, it may backfire.

If you don’t have the money to cover costs such as medical care or assisted living during retirement, your kids will bear the burden of your care.

A study by Care.com found, “Nearly one-third of adult children provide financial assistance to their parents or aging loved ones. […] Parents also might have health issues that force them to get care from their kids, which can place a financial burden on them. Twenty-eight percent of family caregivers spend $5,000 to $19,999 per year on caregiving expenses, and 14 percent spend $20,000 or more per year.”⁸

Many children in these situations end up having to care for both their aging parents and their own children at the same time.

You don’t want to put your children in this challenging situation. 

That’s not all.

When children become dependent on you financially, they fail to become independent.

The empty-nest years disappear as you have grown children still living at home.

What to Do Instead

Parents don’t want their kids to suffer, but, if you help them today, you may accidentally make them suffer tomorrow.

Here is what to do instead.

#1 Pay Yourself First

Whenever you take a flight, the flight attendant provides the following safety instructions:

“Should the cabin lose pressure, oxygen masks will drop from the overhead area. Please place the mask over your own mouth and nose before assisting others.”

Parents should follow this same advice when it comes to helping kids financially.

Before you take care of your adult kid’s finances, you must take care of your own.

You cannot help your child if you don’t take care of yourself first.

Start by always paying yourself first.

Make sure your retirement savings are automatically deducted from your paycheck so you can pay yourself before you pay anyone else.

#2 Work the Numbers

If you feel you must help your kids financially, work the numbers first.

Even if you feel the need to help, it doesn’t mean you actually have the ability to do so.

The worst thing you can do is go into debt to help your kids.

Take a look at where you stand financially to see if you have any room to help your kids out a little.

#3 Budget Accordingly

If you have room to help your kids financially, put it in the budget.

Don’t just give them a hundred dollars here or there.

Factor in how you support your children financially in your budget – after you have budgeted for retirement.

For example, if you plan to cover the cost of cell phones, add this to your budget.

#4 Have the Conversation

While talking to kids about money may feel awkward, it is important and necessary.

Your kids must clearly understand what you can and cannot give them.

This starts when they are young.

Talk to them about what you can pay toward college. Talk to kids about what they can expect from you in the future. 

Don’t set them up for failure by allowing them to believe you will always be their bank.

Explain to kids that you need to plan for your future so that they don’t end up carrying your financial burden.

#5 Set Conditions

In order to protect your financial future while helping kids financially, set conditions.

Know what you can afford and how much you are willing to help.

For instance, instead of giving money to your child whenever he asks, know what you will cover and what you will not.

If you plan to give your child a lump sum for a major purchase, make it clear that this is a one-time deal.

If you plan to cover their utility bill, have a time limit in mind. For example, tell your adult child you will cover the utilities for six months to give her time to build up an emergency fund.

#6 Teach Financial Literacy Early

One of the best ways of helping kids financially is to teach them financial literacy early.

Teach kids how to be responsible with money. Show them how to pay bills on time, how to save money, and how to invest.

Give them opportunities to earn money and pay for their own things while they are young and living under your roof.

#7 Work with a Financial Planner

If you need advice on helping kids financially, speak with a financial advisor.

A financial advisor can provide suggestions for financially helping your kids and securing your financial future.

They can provide tips on managing your savings while helping your kids when they are struggling.

And, possibly, help your kids out as well. 

A financial advisor may also be able to help with estate planning. 

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

Click Here

SOURCES

1. https://www.cnbc.com/2024/03/11/nearly-half-of-parents-financially-support-adult-children-study-shows.html
2. https://www.cnbc.com/2024/03/11/nearly-half-of-parents-financially-support-adult-children-study-shows.html
3. https://www.cnbc.com/2024/03/11/nearly-half-of-parents-financially-support-adult-children-study-shows.html
4. https://www.cnn.com/2024/01/25/success/parenting-adult-children-living-home/index.html
5. https://www.cnn.com/2024/01/25/success/parenting-adult-children-living-home/index.html
6. https://www.bankrate.com/banking/parents-sacrifice-for-adult-children-survey/
7. https://www.bankrate.com/banking/parents-sacrifice-for-adult-children-survey/#sacrificing-emergency-savings
8. https://www.upwave.com/presspost/63-of-kids-plan-to-financially-support-parents-retirement-gobankingrates/

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Saving for your financial future requires more than the bare minimum.

Given the cost of today’s retirement, it’s worth doing what you can now to maximize your 401(k) contributions.

Why 401(k) Contributions Are Essential for Retirement

Retiring isn’t cheap.

Once you stop working, you are still expected to pay the bills.

And they can add up…fast.

Maximizing your 401(k) contributions – whenever and however – is critical to making sure you have enough saved. It doesn’t guarantee it, but it may help more than you think.

And you’re going to need all the money you can as the cost of retirement continues to grow.

Many Americans are worried that they won’t be able to quit working and retire.

Medical issues tend to occur more often as we grow older, which is why it is important to factor medical costs into the cost of retirement.

“According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2022 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement.”¹

Keep in mind that Medicare does not cover everything – you may be responsible for paying for other medical necessities, such as dental, vision, or hearing aids.

[Related Read: The Real Cost of Retirement: Are You Saving Enough?]

In addition to building a healthy nest egg, it is essential to make 401(k) contributions so that you take advantage of compounding growth.

Here’s how it plays out in your 401(k):

• Initial Investment: You contribute money to your 401(k).
• Earnings: Your investments generate returns (interest, dividends, capital gains).
• Reinvestment: These earnings are automatically reinvested back into your 401(k).
• Compounding: The following year, you earn returns not only on your original contributions but also on the previous year’s earnings.

This cycle repeats year after year, creating a snowball effect where your earnings generate even more earnings.

Over time, the impact of compounding becomes exponential, leading to significant growth in your retirement savings.

Here are 4 strategies to help you maximize your 401(k) contributions.

Strategy #1 Pay Yourself First and MORE

One of the smartest financial decisions is to pay yourself first.

Paying yourself first means saving money for yourself and your future before you pay anyone else (e.g., bill collectors).

Make paying yourself a priority and budget for retirement savings.

This is even easier once you set up automatic contributions.

But don’t stop there! Pay yourself MORE!

Look for opportunities to increase your 401(k) contributions, such as boosting your regular contributions according to your raise – rather than boosting your lifestyle.

Or taking the money from your tax refund and putting it in your 401(k).

Another option is to utilize automatic escalation of contributions, where the amount you contribute gradually increases each year.

Don’t forget – Those ages 50 and older can take advantage of catch-up contributions. The 401(k) catch-up contribution limit is $7,500 in 2024.

Strategy #2: Leverage Your Employer Match for More Money in Retirement

Another tried-and-true way to maximize your 401(k) contributions is to leverage your employer match.

Some employers offer a partial match where they match up to 50% of what you contribute up to 6%.

Other employers offer a dollar-for-dollar or 100% match of what you contribute up to a specific percentage.

Whether it is a partial match or a full match, it is still FREE money!

Even a small company match, such as 50 cents on every dollar you contribute up to 6% of your salary, doubles the effect of your contributions on a portion of your paycheck.

That’s an instant 100% return your employer is providing.

Note – It is important to know your plan’s employer match rules. For example, some companies require you to contribute a certain percentage to get the full match.

[Related Read: 3 Reasons to Get the 401(k) Company Match in 2024]

Strategy #3: Rebalance Your Portfolio Regularly

The initial investments you made may not be performing as well as you’d like.

That’s why it’s important to rebalance your portfolio to maximize your 401(k) savings.

Rebalancing involves buying or selling assets regularly in your portfolio to maintain the initial desired level of asset allocation.

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

Strategy #4: Be an Engaged Investor

Don’t set up your 401(k) and forget it.

Instead, get engaged.

It’s your future and your money, so you should take an active role in understanding how it works.

• Read your 401(k) statements. If you aren’t sure how to read them, watch this video.
  
• Ask questions if you don’t know something. Start by reviewing some of our most frequently asked questions and answers. Then, reach out for more help.
• Review and rebalance your investments. As you review your 401(k) statements, ask yourself if the investments you have are working for you.
  

Additional Tips to Maximize Your 401(k) Contributions

In addition to the 4 strategies shared above, there are more choices you can make that may help maximize your 401(k) contributions.

• DON’T cash out your 401(k) early. When you are tempted to withdraw funds, hold strong. You want to allow your money to continue to grow, and you need to avoid penalties. [Related Read: 401(k) Early Withdrawals May Cost You More Than You Think]
  
• Consider Roth 401(k) options. More employers are offering a Roth 401(k) option inside their plans. Do some research and see if this option is the right choice for you. [Related Read: Should I Consider the Roth 401(k)?]
• Seek guidance from a financial advisor. 401(k) Maneuver provides professional account management with the goal of helping you grow and protect your 401(k). Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that harm your account performance.

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 Strategy Session

Sources

1. https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

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Despite a brief 6% correction in the latter part of the first quarter, the stock market has shown resilience and growth in the first half of 2024.

Keep reading for factors contributing to this and what you need to know.

Federal Reserve’s Stance on Interest Rates

The market’s performance has been driven by the anticipation of interest rates finally coming down. 

With stubborn inflation indexes like the Consumer Price Index (CPI) showing signs of easing over the last 3 months, Federal Reserve Chairman Powell has expressed increased confidence in the potential for monetary policy easing. 

The market has interpreted this, along with solid economic growth and a slight weakening in the labor market, as a positive sign for continued growth.

Historical Precedence and Market Concentration

Since 1928, there have been 29 instances where the S&P 500 has risen over 10% in the first half of the year. 

On average, the full-year return during those 29 times was 24%, so we still think we have some upside based on the explosive earnings we’re seeing. 

However, it’s important to note that the S&P 500’s performance has been highly concentrated, with just 5 stocks accounting for approximately 60% of the index’s gains. 

As interest rates are expected to be cut by the September meeting, the market is starting to broaden out, with other sectors and smaller capitalization stocks beginning to perform well.

The AI Revolution: Driving the Market Forward

A new industrial revolution, powered by artificial intelligence (AI), is expected to drive the market forward in the coming years. 

The anticipation of improved earnings, margins, and increased efficiency across various industries has contributed to the strong performance of AI-related stocks, such as Nvidia and Super Micro Computer.

While investing in AI stocks can be lucrative, be prepared for volatility and ensure that your risk tolerance is appropriate. 

As with any emerging technology, there will be companies that succeed and others that may not stand the test of time.

Looking Ahead: Continued Growth and Potential Challenges

As we move into the second half of 2024, several factors point toward continued market growth:

• Lower interest rates and a 95% expectation of a Fed rate cut by September.
• Slowing but still reasonable economic growth.
• Improving earnings and margins.
• The positive impact of AI on various industries.

Check out the video as Mark Sorensen, our Chief Investment Officer, provides further insight into current economic conditions, how the election may affect the markets, and where he thinks we’re headed from here.

 Plus chart reviews!

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

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.

Find out what 401(k) Maneuver may do for your retirement account balance. Click below to book a complimentary 15-minute 401(k) Strategy Session with one of our advisors today.

Book a Call

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Women are saving less for retirement than men – and not just by a little.

Prudential’s 2024 Pulse of the American Retiree survey found, “Across all age groups, women are particularly vulnerable, with less than a third the median savings of men. They are nearly three times as likely to delay retirement due to caregiving duties.”¹

Take a look at the following recent stats that show women are saving less.

• “Men had saved a median of $157,000 for retirement, women had only set aside $50,000.”² 
• “46% of men surveyed said they were looking forward to retirement and had more plans, compared with 27% of women polled.”³ 
• “On average, women retire with a 30% lower balance in their 401(k) plans than men do.”⁴ 
• A 2024 Goldman Sachs report found more than a quarter of women (28%) are saving less than $50,000 for retirement. “Assuming a 4% withdrawal rate, $50,000 in retirement savings provides $2,000 of income per year.”⁵ 
• “Half of women say they feel ‘uncertain’ or ‘worried’ when they think about how prepared they are for health costs later in life.”⁶ 
• 43% of working women report their savings are behind schedule.⁷ 
• More than half of women workers, or 57%, feel they don’t have enough income to save for retirement, and only 19% are “very confident” that they will be able to fully retire with a comfortable lifestyle.⁸

Catherine Collinson, CEO and president of Transamerica Institute and TCRS, told CNBC, “Today’s women are more educated and enjoy unimaginable career opportunities than previous generations. […] Yet, despite these advancements, women continue to be at greater risk than men of not achieving a financially secure retirement.”⁹

As you can see, women are saving less for retirement than men, and it’s a significant problem.

Why Women Are Saving Less

There isn’t just 1 reason women are saving less.

First, women continue to be paid significantly less than men.

Second, women tend to take off work for caregiving, which means they have fewer years to contribute to a 401(k).

Third, women received a different financial education than their male counterparts.

For instance, the Equal Credit Opportunity Act was not passed until 1974, when women were allowed to get a credit card in their own name.

As a result, women were not managing their finances as men did.

Rita Soledad Fernández Paulino, personal finance coach and founder of Wealth Para Todos tells CNET, “We have a whole generation of women whose mothers weren’t necessarily engaging in debt management.”¹⁰

The Retirement Savings Gap

Women are facing a retirement crisis.

This is even more apparent when considering Americans in general are experiencing a retirement savings gap.

[Related Read: Over Half of Americans Think There Is a Retirement Crisis]

The retirement savings gap refers to what people are saving versus what they actually need.

Unfortunately, Americans need significantly more money during their retirement savings than they are actually saving.

Experts today believe retirees need approximately 1 million dollars (1.46 million) to retire comfortably.¹¹

However, a 2024 Vanguard report found, “The average balance in employer-sponsored retirement contribution plans rose to $134,128 in 2023. […] The median account balance was $35,286.”¹²

That’s a long way from a million-dollar nest egg.

Now, factor in the fact that women have even less in their retirement accounts, and it is abundantly clear that women are facing a retirement crisis.

Another primary consideration is that women outlive men, on average.

This means the retirement savings gap is even more significant for women.

According to CNBC, “In developed societies like the United States, women are expected to live for 79 years while men are expected to live around 72 years. This seven-year difference means women need to save a little more money than men to fund the last chapter of their golden years. Even for someone who spends a modest $40,000 a year in retirement, this amounts to an additional $280,000 to cover those final seven years.”¹³

[Related Read: How Long Will Your 401(k) Savings Last in Retirement?]

Reclaim Retirement Planning for Yourself

Whether you are a woman (or a man hoping to pass along essential information to the women in your life), you’ve come to the right place.

Women can boost their retirement savings and get to a place where they feel more financially secure for their future. 

• Familiarize Yourself: You can start to reclaim retirement planning by familiarizing yourself with your 401(k) plan. Unfortunately, many women place retirement planning solely in their spouse’s hands. This is a mistake. Take an active role in planning for your future – especially considering you may outlive your spouse. 

• Educate Yourself: If you need to be more knowledgeable about finances, saving, and investing, give yourself permission to learn. Read financial blogs, listen to financial podcasts, and read books on retirement savings. 

• Review Your Plan’s Rules: If you are in a relationship, you must ensure you and your partner participate in the best 401(k) plan and take advantage of company matching contributions. Read The 401(k) Mistake Married Couples Make to learn more. 

• Start Saving More Now: Don’t put off saving for retirement. Start saving now and give your savings time to grow. Make it a goal to save enough to get the employer match.  

Speak with a Professional: If you have questions, ask the experts. If you want advice, ask the experts. Closing the savings gap for women may come down to simply seeking help from a professional.

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 Strategy Session

Sources

1. https://news.prudential.com/latest-news/prudential-news/prudential-news-details/2024/2024-Pulse-of-the-American-Retiree-Survey/default.aspx
2. https://www.foxbusiness.com/economy/retirement-crisis-looms-womens-savings-just-one-third-mens
3. https://www.foxbusiness.com/economy/retirement-crisis-looms-womens-savings-just-one-third-mens
4. https://www.prudential.com/wps/wcm/connect/9575b53b-09cd-4373-a88e-992f63088683/19-4354573-infographic.png?MOD=AJPERES&CVID=ncgAm0r
5. https://www.wealthmanagement.com/retirement-planning/goldman-sachs-more-one-four-women-retire-less-50k
6. https://www.ncoa.org/article/american-women-report-economic-stress-worry-about-how-they-will-afford-future-health-costs-and-retirement
7. https://www.gsam.com/content/gsam/us/en/advisors/about-gsam/news-and-media/2024/retirement-gender-report.html
8. https://www.cnbc.com/2023/12/29/women-face-a-retirement-savings-shortfall-three-ways-to-close-the-gap.html
9. https://www.cnbc.com/2023/12/29/women-face-a-retirement-savings-shortfall-three-ways-to-close-the-gap.html
10. https://www.cnet.com/personal-finance/banking/savings/why-women-save-less-money-than-men/#why-do-women-save-less-than-men
11. https://www.foxbusiness.com/personal-finance/americans-saving-more-retirement-theyre-nowhere-near-magic-number
12. https://www.foxbusiness.com/personal-finance/americans-saving-more-retirement-theyre-nowhere-near-magic-number
13. https://www.cnbc.com/select/why-women-dont-save-as-much-as-men/

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When it comes to investing for your financial future, understanding the tax consequences is important to growing wealth. 

Because it’s not just what you make, it’s what you keep, that counts. 

How tax savvy are you with regards to your 401(k)? 

Are you aware of the 401(k) tax implications on withdrawals? Or the real benefit of growing your savings tax-deferred? 

Keep reading for more on 401(k) tax implications and how they may or may not impact your future.

#1 Tax-Deferred Contributions

Contributions to a traditional 401(k) are made before taxes are withheld, which reduces your taxable income. 

This means you don’t pay income taxes on the contributions immediately.

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

For example, if you earn $50,000 per year and put 3% of your pay into your 401(k), your investment in your 401(k) would be $1,500.

This $1,500 drops your taxable income down to $48,500.

In some cases, it is even possible for your 401(k) contributions to push you into a lower tax bracket, which may result in paying a lower tax rate.

[Related Read: What to Know Before You File 2023 Taxes]

#2 No Deductions on Tax Returns

Unlike other retirement accounts, you do not need to deduct 401(k) contributions on your tax return. 

The contributions are already taken out of your paycheck before taxes are applied.

This means you save money on taxes today.

Turbo Tax explains, “At the end of the year, when you receive your W-2 form that shows your earnings, you will notice that your wages subject to federal income tax are lower because of your 401(k) plan contributions.”¹

[Related Read: A Good Way to Spend Tax Refunds Wisely]

#3 FICA Taxes

Although you don’t pay income taxes on 401(k) contributions, you still pay FICA taxes on your payroll contributions.

FICA taxes fund Social Security and Medicare programs.

Your FICA taxes are calculated based on your paycheck amount, which includes your 401(k) contribution.

Keep in mind that even though your taxes go toward funding Social Security and Medicare, you will likely still need more money during retirement to cover costs.

Do not plan to rely solely on Social Security and Medicare.

[Related Read: Are You Saving Enough to Cover These Retirement Expenses?]

#4 Tax-Deferred Growth

The investments within your 401(k) grow tax-deferred, meaning you don’t pay taxes on the earnings until you withdraw the money.

This means any income that is gained over time from your investments is tax-deferred.

When you contribute to a 401(k), your money earns interest, and that interest compounds over time – you earn returns on your returns. 

The longer your money is invested, the more it may grow.

Keep in mind that 401(k) plan participants can rebalance their assets to take advantage of potential growth opportunities, which means boosting your savings even more!

[Related Read: 5 Perks of Saving for Retirement in a 401(k)]

#5 Taxable Withdrawals

When you withdraw money from a traditional 401(k), it is taxed as regular income in the year you withdraw it. 

And you pay taxes on the withdrawals at your current income tax rate.

If you want to take a withdrawal from your 401(k), you need to be at least age 59½ to avoid paying an early withdrawal penalty to the IRS.

These withdrawals are subject to ordinary income tax on the amount you withdraw plus a 10% early withdrawal penalty.

[Related Read: Why a 401(k) Withdrawal Should Be Your Last Resort]

#6 Roth 401(k) Contributions

With a Roth 401(k), your contributions are taxed when they go into the plan.

Contributions to a Roth 401(k) are made after income taxes are withheld, so you pay taxes on the contributions upfront. 

However, once your money is invested, your contributions and any earnings grow tax-free and you will not be taxed when you withdraw money from your Roth 401(k) plan. 

Plus, all withdrawals made during retirement are tax-free – including contributions and earnings. 

This may provide significant savings for those expecting to be in a higher tax bracket during retirement.

[Related Read: Should I Consider the Roth 401(k)?]

#7 Tax Benefits in Retirement

When you start withdrawing funds during retirement, you’ll need to pay taxes on both the contributions and the earnings, and they are subject to ordinary income tax rates.

However, the tax benefits of a 401(k) plan are designed to help you save for retirement. 

By deferring taxes until retirement, you may be in a lower tax bracket than you would have been when you initially made the contributions.

This results in a lower tax bill on withdrawals.

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

#8 Employer Contributions

Employer contributions to a 401(k) are generally not taxable to you when made, but you will pay taxes on them when you withdraw the money.

Employee matching contributions are tax-deferred, but these matching contributions are taxed when you withdraw money in retirement.

Your 401(k) company match counts toward your total contribution limit.

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

#9 Catch-up Contributions

Employees with 401(k)s can contribute up to $23,000 for 2024.

For those 50 and older, there is an additional catch-up contribution limit, which may help prepare for retirement.

For 2024, those ages 50 and older, can utilize catch-up contributions up to $7,500 – for a total of $30,500. 

[Related Read: Retirement Plan Contribution Limits for 2024]

#10 Early Withdrawals

Withdrawing money from a 401(k) before age 59½ may result in penalties and taxes on the withdrawals.

The IRS requires automatic withholding of 20% of a 401(k) early withdrawal.

Along with the withholding taxes, the IRS will also hit you with a 10% penalty if you’re under the age of 59½ on all funds withdrawn when you file your tax return.

The amount withdrawn will also be taxed as ordinary income for the year the money was taken out, which could push you into a higher tax bracket and force you to pay even more taxes.

Let’s say you’re under 59½ and you withdraw $15,000 from your 401(k). 

You will wind up having 20% plus the penalty withheld, leaving you with only about $10,500 of the $15,000 early withdrawal. 

[Related Read: 401(k) Early Withdrawals May Cost You More Than You Think]

Make Sure to Seek Professional Advice

Not only do you need to understand the 401(k) tax implications, but you also should seek advice from a professional.  

This is your retirement we’re talking about – and every dollar you keep helps. 

Reach out to your CPA or accountant for specific tax advice.

A CPA or tax professional can help you determine the 401(k) tax implications regarding your personal financial situation.

In addition, seek help from a financial advisor to determine how to get the most out of your 401(k) plan.

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

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