Your employer’s 401(k) plan probably uses one or both of the following contribution methods. Each offers a tax benefit:
Check with your employer to find out which contribution types your plan offers.
The chart below shows the hypothetical growth over 30 years of a traditional, tax-deferred investment compared with a taxable account.
Many companies offer matching funds as an incentive to encourage employees to contribute to their salary deferral accounts. If your employer offers to match your retirement contribution, take it. It’s as if your employer is paying you a bonus — and all you have to do is save in the plan. Contribute at least enough to get the full match. If the match is in company stock, think about diversifying the rest of your account. The match is part of your benefits package. Don’t walk away from it.
If you plan to rely on Social Security to pay all your bills, your retirement dreams may need to be trimmed back. The rule of thumb is that Social Security probably represents only 40% of your retirement needs. In 2018, the average monthly benefit for a retired worker was $1,413.37. Even with cost-of-living increases, this won’t buy the kind of retirement most Americans dream about. When you participate in your retirement plan, you take control of supplementing Social Security.
If your 401(k) or 403(b) plan accepts Roth contributions, limits apply whether contributions are pretax, Roth after-tax or a combination of both. Your plan’s rules may vary.
In a salary deferral plan, you are always 100% vested in your own contributions. However, you’re often required to work for your employer for a certain length of time to become vested in any employer contributions.
If you leave the company before becoming fully vested, you may forfeit part or all of the employer contribution. If you’re fully vested when you leave the company, the entire employer contribution is yours.
If you don’t need the money right away, consider transferring your assets into a rollover IRA or, possibly, into a new employer’s plan. This can allow you to delay applicable taxes, avoid possible penalties and continue benefiting from tax-advantaged growth potential. You may also be able to leave your assets in your former employer’s plan if your balance is large enough. Cashing out of your salary deferral plan is an option, but you’ll have to deal with the tax consequences. Check with your employer for more details.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.