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Mutual Fund Education
Daniel Cross Feb 26, 2018
It takes decades to come to fruition with regular check-ups to ensure you’re on track. Making sure that you’re able to retire from the workforce and enjoy life afterward seems like a herculean task, but luckily there’s a go-to investment plan to help you achieve the ultimate dream – the 401(k).
As of 2016, 61% of U.S. households have some kind of tax-advantaged retirement fund with total retirement market assets worth $25.3 trillion. For the third quarter of 2017, 401(k) plans held $5.3 trillion in assets, with nearly $3.45 trillion (or 65%) of that held by mutual funds.
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At its core, the 401(k) retirement plan is a type of employer-sponsored investment account that is able to be funded by pre-tax contributions. In other words, before taxes are deducted from your paycheck, you have the ability to invest a portion of that income right off the top. This has the added benefit of lowering your income tax liability as well.
A 401(k) also has additional benefits such as transferability to other tax-deferred retirement plans such as an Individual Retirement Account (IRA) and the option to take out loans for qualifying purposes. Hardship withdrawals are also allowed for certain events, making the 401(k) one of the most flexible retirement accounts available.
Ease of transferability makes the 401(k) highly adaptable as well. If you have a plan with a former employer, you have several options. You can choose to simply keep the old plan as it stands with the old employer, although you won’t be able to make any new contributions. This makes sense if you’re concerned about a new plan’s mutual fund options. Otherwise, rolling over the plan to a new 401(k) plan or an IRA is usually the best option, as it allows your money to stay invested and continue growing towards retirement. Finally, you can always cash out the 401(k) plan, although you’ll have to pay taxes and a penalty tax of 10% for early withdrawal too.
One of the most underutilized benefits of a 401(k) is its loan capabilities. Employees can borrow up to 50% of the plan’s balance or up to $50,000 (the lower of the two), but it must be paid back within 5 years, with the exception of borrowing to purchase a home. Interest rates on 401(k) loans are usually very low compared to other loan options as well.
Find out about the most important criteria for selecting a mutual fund here.
Because money is allowed to grow tax-free and your employer contributes funds on top of that, real gains on this type of account can far exceed any other type of product. For instance, even if the market performs flat for the year and you invested $1,200, your employer can match that amount and you’d essentially have a 100% profit regardless. When contributing, you’ll want to carefully look over all the fund options the plan offers and keep an eye on how it’s growing. Finally, a regular rebalance every 6 months is a good way to keep your portfolio healthy and strong.
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