How Does a 401(k) Work?
- Contributions
Employees contribute to their 401(k) for Verizon through payroll deductions. You can specify that a certain percentage of your salary or a specific dollar amount be automatically deducted from your paycheck and deposited into your 401(k) account.
- Tax Benefits
There are two kinds of 401(k) plans:
- Traditional 401(k) plans: You will contribute with pre-tax dollars, thus gradually reducing your taxable income in the year you make those contributions. The taxes are to be levied once you withdraw during your retirement.
- 401(k) Roth: You make the contributions with after-tax dollars, meaning you will not take a tax break on your contributions, but in retirement, qualified withdrawals are tax-free.
- Employer Matching
Many employers encourage saving by matching a portion of your money. For instance, an employer might match 50 percent of your contributions up to 6 percent of your salary. This “free money” can go a long way toward building your retirement savings.
- Investment Options
The funds in your 401(k) are usually invested in some form of mix of assets such as:
- Mutual funds
- Index funds
- Target-date funds
- Bonds
- Stocks
You can choose the investment portfolio of your choice in light of your risk tolerance, financial goals, and time until retirement.
- Contribution Limits
Contribution limits for 2024 are $23,000 for people under age 50 and $30,500 for age 50 and older, thanks to catch-up contributions set annually by the IRS into your 401(k).
When Can You Access Your 401(k)?
Early Withdrawals
Withdrawal from a 401(k) before the age of 59½ always comes with a tacked-on 10% early withdrawal penalty and an income tax. There is an exemption for certain hardship cases or circumstances listed below:
- Medical expenses are above 7.5 percent of your adjusted gross income.
- Permanent disability.
- Qualified for disaster-related expenses.
Required Minimum Distributions (RMDs)
Once you reach age 73, you must draw out at least that amount each year, called the Required Minimum Distribution, or RMD.
What Happens to 401(k) If you Change Jobs?
If you change jobs, you have several options for your 401(k):
- Leave it with your old employer: You can leave the funds in your existing 401(k) plan.
- Roll it over to a new 401(k): You transfer your money into the new employer’s 401(k).
- Roll it over to an IRA: You can move your 401(k) balance to an Individual Retirement Account and, depending on your circumstances, gain access to more investment options.
- Cash it out: This option is not good because of taxes and early distribution penalties.
Max Out Your 401(k)
How to maximize your 401(k):
- Contribute Enough to Get the Full Employer Match: Not taking advantage of an employer match in a retirement plan is like passing up free money.
- Increase Contributions Over Time: Try to hold 15% of your salary in the retirement account, including your employer’s contribution.
- Diversify your Investments: Choose a mix of investments that will work together harmoniously, considering your risk tolerance and retirement time frame.
- Monitor and Adjust: Regularly review your account and adjust it to keep on track.
Why Start Saving Early?
The sooner you start saving in the 401(k), the better you can take advantage of compound interest. For example, if you contribute just $5,000 a year from age 25 and earn an average annual return of 7%, then by the retirement age of 65, you could have more than $1 million. If you start much later, your growth potential is considerably lowered.
Contact M & A Wealth Today
Understanding how a 401(k) for Verizon works is critical to planning your future. M&A Wealth specializes in providing the material to make the most informed financial decisions and setting you up for the best retirement possible. Whether you are just starting in a 401(k) or need help learning how to manage the one you are currently working with, we are here to help.
Contact us today for customized counsel and a free consultation. Let us get a head start on building your financial future!
