Retirement Plan FAQs
We get a lot of questions about investments, especially retirement plans. While everyone has different needs and goals, here are a few common questions I receive, and some basics to take into consideration.
When should I start investing?
Every person is different, but the general guideline is to start when you have the means to do so. Some people start with their employer’s 401(k) or 403(b) plan, especially if they offer a match on contributions. If your employer doesn’t offer this, you may want to consider investing in individual IRAs. If you’re planning on investing in stock, be mindful that all investments involve a level of risk. Consider leaving some savings uninvested in case of an unexpected illness or unemployment.
What’s better: a 401(k) or an IRA?
There are advantages and disadvantages to both. While a 401(k) offers higher maximum contribution levels, you can only invest in one if your employer offers it. In 2022, The maximum deferral of a 401(k) plan is $20,500 annually, while an IRA basic limit is $6,000 annually, or $7,000 if you’re over 50. 401(k) plans also offer catch-up contributions for participants 50 and older. For traditional and safe harbor 401(k) plans, the 2022 catch-up limit is $6,500.
If you’re lucky enough to have a 401(k) offered at work, that doesn’t necessarily preclude you from also investing in an IRA. Depending on your needs, you may also want to consider a Roth IRA, where qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings before age 59½, or before the account is open for five years, whichever is later, may result in a 10% IRS penalty tax.
When can I start withdrawing from a retirement account without penalty?
With a 401(k), you can start to withdraw without penalty at 59½, but if you’re still working, your employer may not allow you to withdraw funds. You’ll also owe federal and state taxes. Any withdrawals before 59½ are subject to a 10% tax unless you qualify for an exception. You’re required to start minimum distributions at 72.
With a traditional IRA, you can also start withdrawing at 59½, though you’ll owe federal and state taxes. If you withdraw before 59½, you may be subject to an additional 10% tax.
Can I take an early withdrawal from my retirement account without penalty?
There are many qualifying reasons for early withdrawal from both traditional IRA and 401(k) plans, but remember that although you won’t pay a penalty, you will have to pay tax on any funds withdrawn, unless an exception applies. Some qualifying reasons include:
- Higher education for you, your child, or your spouse
- A first-time home purchase (up to $10,000)
- Medical expenses or insurance costs if your unreimbursed medical expense is more than 10% of your adjusted gross income
You can view the full list of exceptions on the IRS website.
How do I choose a financial professional?
It’s important that you feel comfortable with the financial professional you’re working with. If you’re not sure where to look, ask friends and colleagues for recommendations. Many firms also offer initial consultations to help you see if you’re a good fit for each other. Be sure to take a look at their values, services, fee structure, and processes before making any decisions. Ready for the next step? You may think you're not, but you are so give us a call to learn more about what we can do for you.
This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.