The average 401(k) balance was around $103,000. The median, which is the number between the highest and lowest amount, was roughly $24,500. The average gets skewed by the rare millionaire accounts.
How does your 401(k) compare? Are you contributing as much as you can? Take a look at these 401(k) facts to help you figure out why you should start saving more.
1. Your 401(k) is Tied to Your Job
If you use your employer's 401(k) plan, they will take a portion (or percentage) out of your salary and put that money directly into your account. Many employers offer a match which means they will match how much you put in up to a limit. This is actually free money.
It's important to take full advantage of the employer match to maximize your retirement savings.
If you get a new job, you will not be able to contribute to your old company's 401(k) plan. You should consider rolling it over to an IRA or your new employer's 401(k). If you take out the money, you will face significant fines if you are younger than 59 1/2.
2. Contribution Limits are High for Traditional 401(k)
If you want to put back a lot of money, the contribution limit for the traditional 401(k) in 2020 is $19,500 or $26,000 if you are over 50.
If you are just starting out, this limit seems pretty high. However, once you are more financially stable, you can start putting extra back for retirement.
3. Lower Income Taxes with Pretax Contributions
Traditional 401(k) plans are taken out of your paycheck before your income tax. This means you are saving more money.
Your contributions to your 401(k) also lower your income taxes because your taxable income is lower after the 401(k) funds are taken out of your paycheck.
You will pay the income tax when you take out the funds.
If you opt for a Roth 401(k), your money is taxed before you make your contribution. Because the IRS can only tax you once, they will not tax you when you pull out your funds.
4. You Can Borrow Against Your 401(k)
Some plans allow you to borrow against your 401(k). You typically pay them back through extra payroll deductions.
Be careful if you plan to leave your job because you will owe the full balance before that year's income taxes are due.
If you take out money, you will not get any market gains with that portion. This is why you invest in a 401(k) in the first place to make more money for retirement.
5. Can't Make Withdrawals Until 59 1/2
Because there are tax advantages to a 401(k), you cannot withdrawal whenever you want. You have to wait until retirement age or 59 1/2. If you try to take out before, you will get charged income tax and an additional 10 percent fee.
There are a few exceptions. If you are retiring from an employer, you can withdrawal at age 55. You may also be able to use your 401(k) if you have hardships such as significant medical expenses or disability. You will want to talk to a tax advisor before pulling out funds.
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