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401(k) Planning: What Do You Need to Know?

By Marjorie L. Rand, CPA, CFP®, RICP®

Tax-advantaged retirement accounts like 401(k)s are one of the most powerful tools for building and preserving your wealth. Not only do they save you money on taxes—one of your biggest expenses—they also allow your savings to compound and grow over time. Combining these attributes with an employer match, it can make the 401(k) an unbeatable investment vehicle.

Enrolling in a 401(k) plan through your employer is as simple as checking some boxes and signing your name, but to truly get the most out of your retirement account, you need to understand how they work. Let’s discuss some of the basics so you can make your retirement plans work even harder for you.

Investment Choices

Picking the investments in your 401(k) can be overwhelming and confusing. Often there is more than one choice for each category. As a result, target-date funds have become popular choices recently, allowing participants the convenience of having their investments on autopilot in one fund based on a projected retirement date. 

However, if you decide to split your allocation between a target-date fund and another mutual fund, you may leave yourself open to duplications in certain asset classes and have a completely skewed mix of assets. In addition, target-date funds offer a cookie-cutter solution for what may not be a cookie-cutter need. Each individual has a unique and personal situation that may require different asset mixes than the predetermined asset mix of a target-date fund.  When you choose this option, there’s no room for personalization.  

Roth 401(k)s

While Roth IRAs put income limits on who can contribute, Roth 401(k)s do not have this limit. The question is do you want to pay taxes now or in the future? If you expect to be in a lower tax bracket at retirement (which isn’t always the case), then the regular 401(k) is the option for you. It’s hard to predict the future, but all your pensions, Social Security, investment accounts, 401(k)s, and IRAs could add up and put you in a higher tax bracket. Think about your spouse; if you should pass away, they will have to file as a single person, increasing their tax burden. 

Contribution Limits

It’s important to know your limits. For 2022, you can defer as much as $20,500. The total limit for employee deferrals plus employer contributions is $61,000. An additional $6,500 in catch-up contributions is allowed for those over 50.

Valued Advice From a Trusted Advisor

You’ll need to consider many factors when participating in your company’s 401(k) plan, and a little extra thought and consideration can make a big difference in your financial future. As with any important financial decision, it’s wise to first consult with an experienced professional.

My goal is to help my clients be  fully prepared by helping them strategize a plan which is safe, efficient, and provides peace of mind. Their portfolios may have multiple accounts, including their 401(k)s. I view these as one entity, rather than looking at each account separately. Implementing the right strategy within your 401(k) is an essential step. 

If you need help planning for your financial future, schedule a 20-minute introductory call or reach out to me at 908-895-2406 or marge@randfinancialplanning.com.

About Marge

Marjorie Rand is founder and financial advisor at Rand Financial Planning, a comprehensive, fee-only, fiduciary financial planning firm. Marge specializes in helping her clients plan for a secure retirement and navigate life’s many transitions through customized, tax-efficient retirement planning. She is passionate about empowering her clients to make the best financial decisions for their life and being by their side no matter what life throws at them. Marjorie spent many years as a CPA before founding Rand Financial Planning so she could be a go-to source for all her clients’ financial needs and help them avoid costly mistakes. She has a bachelor’s degree in accounting from Rutgers University and a Master of Science in Taxation from Fairleigh Dickinson University, along with the Retirement Income Certified Professional® (RICP®) and CERTIFIED FINANCIAL PLANNER™ certifications. When she’s not working, Marge enjoys boating, horseback riding, traveling, and hiking with her husband and her dog, Rangeley. To learn more about Marjorie, connect with her on LinkedIn.
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