Clear Direction for Your Retirement: The Benefits of 401K Plans in 2023
As we enter 2023, it’s important to consider the continued usefulness of 401k plans for retirement savings. After all, 401k’s offer one of the best path’s to possibly achieving financial independence in retirement and with the future of retire-ment as uncertain as it is today, it’s up to each of us to make sure we’re doing all we can to achieve financial security.
First and foremost, let’s remember what a 401k plan is. It’s a type of employer-sponsored savings plan that allows employees to save and invest a portion of their pre-tax or after-tax earnings for retirement. Add to this fact that there are now Roth 401k options and some plans even match to your Roth 401k balance
(rather than to the pre-tax 401k balance as was the case prior to 2023) and you’ve got a pretty good lineup to stash the cash necessary toward retirement.
So what are some reasons why 401k’s are still useful in 2023?
- Convenience: 401k plans allow for automatic contributions from your paycheck, making it easy to save without having to actively think about it.
- Tax benefits: Contributions made to a 401k are made pre-tax, reducing your taxable income for the year. This can lead to a lower tax bill and more money in your pocket. Roth 401k contributions and matching can have the opposite effect today, but can pay tremendous dividends down the road from a tax perspective for those disciplined enough to do it.
- Employer matching: As mentioned, some employers offer matching contri- butions, effectively giving you free money for your retirement savings. If you’re fortunate enough to work for one of these employers it’s a terrific enhancement.
- Diversification: 401k plans have a fiduciary duty to the participants of the plan. Thus, they typically offer a range of investment options, allowing you to diversify your portfolio and potentially reduce risk. However, it’s important to understand that this is not the same for all plans and most don’t offer fiduciary investment advice to the participant. It is estimated that over 95% of 401k participants never made any adjust-ments to their plan investments in 2022 regardless of market conditions (likely in part for the reason previously stated) and that is a big problem. Unfortunately, many corporate plans still don’t provide a wide enough swath of investment options to access all areas of the market or to drill down to areas of focus like particular sectors and most don’t havea true cash option. Furthermore, the majority of plans still revolve around mutual funds which may or may not be the most cost efficient route for the participant. As with anything, there are pluses and minuses to 401k plans but they are still a useful tool for retirement savings in 2023. We believe that how you invest in and manage your 401k plan should be coordinated with the other financial areas of your life and rooted in a solid, fiducia-ry financial plan. That plan should drive the decision making for all your financial decisions toward retirement.
Whether it’s understanding how much you should be investing and its tax implications to you now and in the future or getting fiduciary investment advice on what to invest in within your plan based on what they provide, we’ve got you covered and we can help.
I hope this is helpful to your retirement journey. Call us, come see us or visit us online at www.woottonfinancial.com, we’d love the opportunity to help address your questions and concerns and provide you with Clear Direction for Your Retirement®.
Investment Advisory services offered through Game Plan Advisors, Inc., a registered investment advisor. Insurance services offered through Wootton Financial Group, Inc. Game Plan Advisors, Inc. and Wootton Financial Group, Inc. are affiliated through common ownership. Neither Game Plan Advisors, Inc nor Wootton Financial Group, Inc. offer legal or tax advice. Please consult the appro-priate professional regarding your individual circumstance. Not associated with or endorsed by the Social Security Administration or any other government agency.
Please consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the annuity is surrendered.
Fixed Annuities are long term insurance contacts and there is a surrender charge imposed generally during the first
5 to 7 years that you own the annuity contract. Withdrawals prior to age 59-1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax. Any guarantees of the annuity are backed by the financial strength of the underlying insurance company.
Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. With-drawals are taxed as ordinary income and, if taken prior to 59 ½, a 10% federal tax penalty. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated.