How Inflation, Returns, Taxes and Fees Affect your 401(k)

 

Retirement is a time to stop and smell the roses. You’ve worked hard for many years and eventually it will be time to comfortably retire and enjoy the rest of your life. In order to be truly comfortable, it’s important to devise a proper plan to build wealth for you and your family. One of the best ways to increase financial security is to participate in your company’s 401(k) plan. Below are some important items that impact your 401(k) that every investor should be aware of.

Inflation

Do you remember hearing how much it cost your grandparents to go to the movies? A lot less than it does now! Over the past decade, the average inflation rate was 1.78%¹. Inflation causes an increase in prices for energy, food, commodities as well as other goods and services.

Below are ways to fight inflation before and during retirement:

• Factor inflation into your financial plan
• Remain invested long-term
• Stay invested during retirement

Returns

Instead of asking what to expect in total return from your 401(k) plan, ask yourself what you can do to increase your total return. You can’t change the stock market, but you can control how you contribute and manage your money.

Below are ways you can maximize your returns:

• Take advantage of the employer’s match
• Increase your contribution when possible, especially when you receive a raise
• Start early and stay invested long-term
• Talk to your financial Advisor about what asset allocation is best for you

Taxes

Most 401(k) plans offer a Traditional and Roth option to invest in. It’s important to know the difference, as they are taxed differently.

Traditional 401(k) – You make pre-tax contributions to your retirement account. The money grows tax-deferred. You don’t have to pay income taxes until you withdraw the money (typically upon your retirement).

Roth 401(k) – You make after-tax contributions to your retirement account. The money grows tax-free. With the Roth 401(k) option, you will be able to make tax-free withdrawals provided two conditions are met:

• A withdrawal must be a “qualified” distribution. This means money can be withdrawn from your Roth 401(k) when you are age 59 1/2 or older, upon disability, or death.
• Your Roth 401(k) contributions must remain in the plan for at least five years starting from the first day of the year of your first contribution. If you plan to contribute to a Roth 401(k), the sooner you start contributing, the easier it will be to meet this five-year requirement.

Fees

The Department of Labor requires companies to send you a fee disclosure form which explains the different fees you are paying. The DOL recently released a ruling promoting fiduciary standards for investment advisors ensuring they are putting their clients’ interests above their own. It’s important that your plan sponsor is reviewing your fees with their advisor, to ensure they have the best plan in place to meet their business needs.

¹http://www.usinflationcalculator.com/inflation/current-inflation-rates/

This article was originally published in the Maryland Construction Network’s Networked & Connected Newsletter.

Tags: 401(k), Retirement

This entry was posted on Tuesday, January 16th, 2018 at 12:00 pm and is filed under 401(k), Blog, Retirement Planning, Tax Planning . You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.