fbpx

401k Rules of Thumb to Grow Your Retirement Fund

A 401k can be an essential part of your retirement strategy. These plans allow employees to contribute a specific portion of their salaries to the program, which employers have the option to match. 

The contributions you make to your 401k are then invested in stocks, bonds, and mutual funds, helping them grow over time. The hope is that your 401k ends up providing you with enough money to retire on in the future because of the gains it makes. 

There are also tax benefits associated with 401k plans, as you typically won’t pay tax on the amount you invest until after retirement. A Roth 401k is the opposite, though, as you’ll pay tax now but not on your withdrawals. 

Every person’s retirement goals are different and require individual planning, but there are some basic guidelines everyone should be aware of when implementing a 401k strategy. This guide will take you through some 401k rules of thumb that can point you in the right direction as you plan for your future.

An Overview of Some Basic 401k Rules

someone planning their 401k starting with basic rules

It’s wise to learn some 401k rules before you begin investing, as this knowledge ensures you’re making informed decisions. The goal is to invest enough money right now to provide a comfortable retirement later, but some regulations provide a framework. Here’s what you should know:

Tax Rules 

You’ll have to pay tax on your 401k contributions, either now or later. Traditional plans allow you to deduct your contributions from your taxable income and pay the tax when you withdraw it. Roth 401ks, on the other hand, permit you to keep your current taxable income the same to avoid paying tax in retirement. Either way, you’ll have to pay tax on any employer match contributions you receive when you remove the money.

Withdrawal Rules 

You can’t withdraw any money from your traditional 401k until you’re 59.5 years old, or you’re responsible for a 10% early withdrawal fee. That penalty doesn’t apply to Roth contributions. Other exceptions to this rule include SEPP payments, the Rule of 55, qualifying medical expenses, disability, 401k loans, and qualified domestic relations court orders.

Contribution Limits 

You can’t put as much money as you want into your 401k every year because rules limit the contributions you can make. You’re only permitted to contribute $19,500 to your plan in 2021, but that number increases to $26,000 if you’re 50 or older. Your total contributions, including the amount your employer contributes, are capped at $57,000 per year, or $63,500 for anyone 50 and up.

Required Minimum Distributions 

You’ll have to begin making annual withdrawals from your 401k account by the time you’re 72 years old. The exact amount you’ll have to remove from your account depends on how much money you have available and your life expectancy. Required minimum distributions do not apply to Roth 401ks because you’ve already paid tax on the money.

Learning some basic rules before developing a retirement strategy makes it easier to understand where you’re heading. This information makes it more likely you can take full advantage of everything these plans offer while avoiding potential problems and penalties.

4 Retirement 401k Rules of Thumb to Remember

401k rules of thumb to remember

Every retirement plan is different because it depends on when you want to retire, how much money you’re making right now, and your retirement goals. There are some 401k rules of thumb to remember, though, as they’ll make it easier to create a framework to follow. Here’s a look at four of them:

1. You’ll Need 80% 

One decades-old 401k rule of thumb is that you’ll need 80% of your current income to live on once you retire. It’s worth noting that this rule is based on the idea that you’ll be mortgage-free once you retire, which may or may not be possible. Some families might need more while others can get by on less, but the 80% rule creates a starting point as you plan for retirement.

2. Retirement Starts at 65 

Many people wait until 65 to retire for one reason: Medicare. Retiring before you’re 65 years old could mean you’re no longer on your company’s health insurance plan, but you won’t be covered on Medicare until you reach that age. It’s advisable to plan your retirement around this age unless you have some other way to secure health insurance in the meantime. 

3. The 4% Rule 

Those who take 4% of their retirement capital every year starting at age 65 are unlikely to outlive their funds. The 4% rule takes inflation into account, too, but you should know it also uses past market performance. A sudden stock market crash as you approach retirement or after you’ve already retired could put you in a challenging situation. 

4. 100 Minus Your Age 

It’s often a good idea to reduce your exposure to equities as you age because you might not have time for the market to recover. Enter the “100 minus your age” rule, which suggests limiting the percentage of stocks you’re holding in your retirement fund to a number equal to 100 minus your current age. An investor who is 77, therefore, should only have 23% of their investments in stocks.

These 401k rules of thumb don’t necessarily apply to every situation because countless variables are at play. They are easy-to-remember strategies, though, that can assist as you make decisions on the fly or meet with experts while planning your financial future

Every Retirement Is Different, so You Need Expert Guidance

Only you know your exact retirement goals, so while these 401k rules of thumb can provide a baseline, you’ll want to develop a plan that matches your future aspirations. Meeting with a retirement planning expert can provide insight into the best way to reach your goals. 

Bogart Wealth is a team of financial and wealth management advisors who can assist as you plan for the next stage of your life. We offer investment management and retirement planning services as well. Contact Bogart Wealth today to learn about your best financial options moving forward.

IMPORTANT DISCLOSURE INFORMATION:

Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.bogartwealth.comPlease Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Bogart Wealth client, please contact Bogart Wealth, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

latest posts

Stay up to date with our most recent news and updates!

IT Support by SADOSSecure, Fast Hosting for WordPress

Work with a financial advisor who puts your needs first.

Want to talk first? Call us at
(866) 237-0121

  • This field is for validation purposes and should be left unchanged.

You are now leaving the Bogart Wealth, LLC / Bogart Wealth™ (“Bogart”), website and entering a third party website that we do not control.

Bogart is not responsible for third party websites hyper linked our website, and does not guarantee or necessarily endorse any content, recommendations, products or services offered on third party sites.

In addition, third party websites may have different privacy and security policies than Bogart. Therefore, you should review the applicable privacy and security policies of any third party website before you provide any information.

Ok