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Retirement and 401(K): What You Need to Know

hand putting coin in piggy bank; chalk board behind reads 401K



Understanding Retirement and 401(K)

Unless you’ve been grandfathered into a classic pension plan at your company that promises to fund your retirement, saving for retirement is your job. Given that most Americans have very little in savings and only small amounts saved for their retirement, this should be alarming news.

What is a 401(K) account?

A 401(K) is similar to a savings account. In this account, a portion of your pre-tax income gets deducted from your salary and deposited into your 401(K). This means you’re not taxed on this money right away. So, you’re keeping a portion of your salary for retirement and not getting taxed on it. There are certain limitations to how much you can deposit into these accounts each year. With this account, you can invest in different ways.

One way to manage a 401(K) is to simply let it accrue interest. This is the safest way to guard your money, but it’s not profitable. Investments such as mutual funds, bonds and stocks have a much higher return on investment than simple interest.

There is a big risk involved with investing in the stock market. Don’t trust your 401(K) funds with anyone who isn’t an expert in retirement investing and wealth management. You must decide for yourself how much risk you can tolerate. If you can’t afford to lose money, chances are you should focus on low risk investment options.

401(K) and Taxes

One of the chief benefits of using 401(K) funds for investment is that they’re not subject to capital gains taxes, interest or dividend charges.

What does this mean?

If you invest money from your bank account into a stock account and you make a dividend on your investment, you’ll be subject to capital gains taxes on that dividend. You’re only subject to interest and capital gains taxes when you withdraw from the account. While your money is in the account, it’s tax-deferred.

Other Benefits of 401(K)

Since companies don’t generally offer standard pensions, they often offer perks to match a portion of your contribution to your 401(K) plan. If you leave your job, you have options as to how to handle your previous 401(K) options. One option would be to cash out the account, paying the penalty fee and taxes. Other options allow you to “roll over” your previous funds into the next company 401(k). Still, others would have your 401(K) dollars deposited into an IRA account.

Withdrawing Funds from 401(k) & Financial Hardship Provisions

When you leave a job and you choose to cash out a 401(k) you’ll pay a penalty fee of 10% plus income tax on the amount in your account. There are certain instances where the 10% penalty would be waived under the provisions for hardship withdrawal. This means if there’s a serious, urgent need to withdraw the funds, you may do so. There are only certains ways the money may be spent, however, including prevention of foreclosure on your home, preventing eviction, college expenses, purchasing a non-investment home property, certain medical expenses or extreme cases of financial hardship.

Other non-hardship withdrawals may have the penalty waived as well. These instances include permanent disability, a layoff or termination at or beyond age 55, excessive medical debt or a court order to award the funds to a dependent child or spouse.

If you’re facing financial hardship, you’re not alone.  We’ve helped many clients who for a number of reasons weren’t able to stay current on their bills. To speak to a certified credit counselor about what options you have, call CreditGUARD today at Call CreditGUARD Today.