Many employees don't contribute as much to their 401(k) retirement funds as they should. These 401(k) facts will help you figure out if you're missing out.
As of 2019, 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 higher by the rare millionaire accounts. The takeaway? Unless you're a millionaire, you're probably not saving enough.
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.
The following facts also generally apply to 403(b) and 457(b) retirement plans.
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 401(k) account. Many employers offer a match which means they will match how much you contribute 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 are in a position that allows you to save 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 contributing more towards your retirement.
3. Lower Income Taxes with Pretax Contributions
Contributions to traditional 401(k) plans are taken out of your paycheck before income tax. This means you are saving even 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 during retirement. However, most people are in a lower tax bracket when they retire which lowers the eventual tax liability.
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 during retirement.
4. You Can Borrow Against Your 401(k)
Some plans allow you to borrow against your 401(k). You typically pay the money back through extra payroll deductions and there may be an interest rate applied similar to other types of loans.
Be careful if you have an outstanding loan and plan to leave your job because you will owe the full loan balance before that year's income taxes are due.
If you take out a loan, 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. So only borrow when it makes sense.
5. Can't Make Withdrawals Until 59 1/2
Because there are tax advantages to a 401(k), you cannot withdraw money whenever you want. You must wait until retirement age or 59 1/2. If you withdraw money before turning 59 1/2, you will get charged income tax and an additional 10 percent penalty.
There are a few exceptions. If you are retiring from an employer, you can withdraw at age 55. You may also be able to use your 401(k) if you have hardships such as significant medical expenses or a disability. You will want to talk to a tax advisor before pulling out funds, however.
Looking for More 401(k) Facts?
If you are looking for more 401(k) facts or want to learn about more ways to save for retirement or in general, keep checking out our site.
Find out how to manage your 401(k) after you leave your employer or things you should understand about your 401(k).
