Most people know about the 401(k) match and the tax break you often get for saving money in a 401(k) plan. But there are other lesser-known benefits of investing in a workplace retirement account. Don’t miss out on these 401(k) plan perks.
The early withdrawal penalty ends at a younger age. There’s typically a 10 percent early withdrawal penalty if you take a retirement account distribution before age 59 1/2. However, if you leave a job in the year you turn 55 or later (or age 50 for public safety employees), you can take penalty-free 401(k) distributions from the 401(k) affiliated with that position. “If you are retiring between ages 55 and 59 1/2, it probably makes sense to leave your money in the 401(k) because you can take that money out without penalty,” says Gabriel Anderson, a certified financial planner for Crafted Wealth Management in Venice, California. If you roll your savings over to an individual retirement account, you will have to wait until age 59 1/2 to take a distribution without incurring the penalty.
[See: 10 Ways to Make Your 401(k) Balance Grow Faster.]
Workers can delay distributions until they retire. Distributions from 401(k)s and IRAs are typically required after age 70 1/2, and income tax is due on each withdrawal. The penalty for missing an annual distribution is 50 percent of the amount that should have been withdrawn. However, if you are still working and don’t own 5 percent or more of the company you work for, you can defer required distributions and the resulting tax bill until you actually retire. “You can delay the distributions until April 1 of the year after you retire if you are not more than a 5 percent owner,” says Maureen Poplaski, a certified financial planner for Lighthouse Financial Management in Westerly, Rhode Island. With a traditional IRA, you will have to take distributions after age 70 1/2 regardless of whether you are actually retired.
Participation is allowed at older ages. After you turn age 70 1/2, you can no longer claim a tax deduction for your traditional IRA contributions. However, you can continue to save in your employer’s 401(k) plan and defer paying income tax on your deposits if your company allows it. You may be able to continue to participate in the 401(k) plan until you leave the job. Keep in mind that 401(k) plans are allowed to exclude employees who are under age 21 and those who have less than a year of service to the company.
[See: 10 Painless Ways to Save More for Retirement.]
Bigger contribution limits. IRAs allow workers to claim a tax deduction on only $5,500 per year, or $6,500 if the account owner is age 50 or older, which can make it difficult to build up a large retirement account balance. But 401(k) plans have much higher contribution limits of $18,000 in 2016, and the limit jumps to $24,000 for people age 50 and older. “Once you turn age 50, you can take advantage of an extra $6,000 contribution,” says MaryAnn Monforte, a professor of accounting at Syracuse University’s Whitman School of Management. These 401(k) contribution limits are also adjusted each year to keep up with inflation.
[See: How to Reduce Your Tax Bill by Saving for Retirement.]
Fee disclosure is required. Investing isn’t free. Most types of investments charge a variety of fees, but it can sometimes be difficult to discern exactly how much you are paying to own each fund. When the funds are in your 401(k) plan, it’s easier to evaluate how much they cost. Each year, 401(k) plans are required to send you a 401(k) fee disclosure statement that lists the annual gross expense ratio of each investment option in a single document. This allows you to easily compare the costs of every fund in your 401(k) plan and select the lowest-cost fund that meets your investment needs. The document also identifies specific actions that might trigger other types of fees in your 401(k) plan, which can help you to avoid the extra costs. “Usually you will see a mix of the expensive funds and some cheaper options,” says Anjali Jariwala, a certified financial planner for FIT Advisors in Chicago. “The expensive funds are going to have expense ratios of 1 percent or more.”
Emily Brandon is the author of “Pensionless: The 10-Step Solution for a Stress-Free Retirement.”
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5 Little-Known 401(k) Plan Perks originally appeared on usnews.com
