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Understanding 401(k) basics

Your retirement future is up to you. Use this checklist to ensure you are on track. One of the distinguishing characteristics of a 401(k) retirement plan is how much employee involvement there is, particularly at the start.

You decide how much of your paycheck to contribute.
You decide how to invest your money.
You decide whether to make changes in your investment selections.
You decide how you want your proceeds paid out upon retirement.

Tax-deferred contributions

The money you put into your 401(k) plan is not taxed as income until it is withdrawn. The same is true for Individual Retirement Accounts (IRAs). But with a 401(k) plan, you can defer nearly four times as much of your pretax earnings.

In 2016 the maximum yearly pretax deferral limit for 401(k) plans is $17,000. If you are 50 or older, you may make an additional $5,500 in catch-up contributions.

Almost all 401(k) plans handle contributions as payroll deductions, just like your taxes. You never even see the money. But thatís good in this case, because every payday your contributions are lowering the amount you pay taxes on and funding your own powerful retirement investment program.

Tax-deferred growth

Any earning that occur in your account stay tax free. That means any growth in your nest egg is reinvested without paying out taxes to Uncle Sam. You donít pay taxes on the savings or growth until you withdraw the money. Compounding can take hold more quickly. That allows your account to grow in value over time.

Individual choices

Most 401(k) plans allow you to choose how you invest your money. The plan administrator provides a choice of investments. These might include cash equivalents, bonds, stocks or a mix. A 401(k) plan helps you create a diversified retirement investment portfolio and decide exactly how aggressive or conservative you wish to be.

This flexibility gives you control over your financial situation now and in retirement. If you are young and single, or older and an empty-nester, you may be able to maximize your contribution level. During the years in between, the expenses of raising a family may require you to reduce that level for a time. Many 401(k) plans let you borrow money from your account, or even withdraw it prior to retirement in qualifying cases of hardship. This is not a decision to make lightly, however. Taking money out of your retirement account for a period of time can significantly reduce the amount of money you originally planned to have at retirement.

Employer support

As an extra benefit, employers may choose to match employee contributions. This means they will add money to your account. Typically, the percentage of matching is based on what you put into the plan.

For example, a company may match $0.50 on the $1, up to 4% of pay. That means for every $1 you put in the plan, they will add $0.50. They will keep adding this money until your contributions reach 4% of your pay.

So whatís the right amount to save in your plan? The answer varies for each person. At the very least, try to contribute up to the match. Donít leave money on the table. This is money your employer wants to give you, but you have to save some, too, to get it.

In a 401(k) plan with employer matching, every dollar your employer contributes to your account adds directly to your investment return. Even if your 401(k) plan does not include employer matching, the built-in flexibility and the advantages of tax deferral make it a wise primary choice for funding your retirement.

Core securities, when offered, are offered through GWFS Equities, Inc. and/or other broker dealers.

GWFS Equities, Inc., Member FINRA/SIPC, is a wholly owned subsidiary of Great-West Life & Annuity Insurance Company. Recordkeeping and administrative services are provided by Empower Retirement™.

This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for investment, accounting, legal or tax advice.

What is a 401(k)?

A 401(k) is an employer-sponsored plan that allows you to save for retirement. Four things help make them so popular:
  1. Tax-deferred contributions
  2. Tax-deferred growth
  3. Individual choices
  4. Employer support