Which 401k Plan Is Best For Me

What Are The Benefits Of A 401k

401 tax benefits are hard to dispute, as they can offer workers a lot of financial security, including:

• Employer match

In fact, let’s dig into 401k benefits a little deeper.

401k employer match

Do you like free money? Good, now that we’ve got that out of the way, a company-matched 401k is basically that. Many employers offer to match employee contributions, either dollar for dollar or 50 cents to the dollar, up to a set limit. So, for example, say you make $100,000 a year and your employer offers a 401k matching of 50% up to the first 6% you elect to contribute. If you contribute 6% of your annual earnings , your employer would contribute an additional 50% of that amount. So, 3,000 free dollars.

It’s up to your employer to decide what percentage they will match, but many companies do offer a dollar-for-dollar match.

401k tax breaks

The tax benefits of 401ks are like the triple-crown of finances. First, contributions are pre-tax. You dont pay taxes on the money until you withdraw it when you retire.

Second, your 401k contributions are not counted as income, which could put you in a lower tax bracket. The result: your tax bill will be smaller for your having squirreled away money for your later years.

401k shelter from creditors

If your finances take a turn for the worst, you won’t have to worry about creditors coming for your 401k. Your qualified retirement plan is protected by the Employee Retirement Income Security Act of 1974 from claims by judgment creditors.

How We Picked The Best 401 Companies

GOBankingRates determined the Best 401 Companies by analyzing eight major providers of 401 services, using the following criteria:

• Employer fees
• Number of different investment vehicles available, with two ETFs and mutual funds generally being the maximum available
• 24/7 phone customer service
• Educational resources, such as courses or articles on investing, trading or how your 401 works webinars blogs etc.
• Research and tools, such as multiple trading platforms, in-depth market analysis, screener tools for stocks, ETFs, bonds, etc.

Each 401 company was scored based on these individual categories, which were then summed up for a final score. One category, 24/7 phone customer service, was weighted half while all other categories were weighted in full for final scoring.

• Best Roth IRA Providers

Karen Doyle is a Boston-based writer specializing in personal finance. She worked as a financial advisor, with Series 7 and 63 licenses, for several years.

Andrew DePietro contributed to the reporting for this article. He was the lead researcher for GOBankingRates and a finance writer with years of experience covering investing, taxation, Social Security, entrepreneurship, real estate and housing markets.

Erika Giovanetti is a writer with experience covering a multitude of subjects, from personal finance to politics to the great outdoors.

Target Date Retirement Funds

Target-date retirement funds have become staples of 401 plans. As the name implies, these funds allow investors to choose a targetcalendar yeartiming that is nearest their desired retirement date. The employee then allocates 100% of their 401 dollars to the target-date fund.

For example, if a 401 participant expected to retire around the year 2035, they could allocate 100% of their 401 contributions to a target-date retirement 2035 fund and not worry about any further portfolio management. These funds can also make for good “default” funds for 401 participants who do not want to select their investment options.

To provide a range of target datesand depending upon the employees’ age demographicsmost 401 plans should offer a range of target retirement dates through 2050 and the decades in between.

Also Check: Can You Pull From Your 401k To Buy A House

What Is A 401k

A 401k is an employer-sponsored retirement account. It allows an employee to dedicate a percentage of their pre-tax salary to a retirement account. These funds are invested in a range of vehicles like stocks, bonds, mutual funds, and cash. Oh, and if you’re curious where the name 401k comes from? It comes directly from the section of the tax code that established this type of plan specifically subsection 401k.

What Is A Good Amount Of Money For Retirement

The appropriate amount of money that is considered “good” for retirement is based on a variety of factors, such as your current lifestyle, desired lifestyle in retirement, obligations, and health. It is often suggested that your annual retirement income should be equal to 80% of your last job’s annual income.

Recommended Reading: What Is The Minimum Withdrawal From 401k At Age 70.5

Where Is Your Money Is Being Invested

Trust me, you don’t need to become a financial expert to figure this out. Let’s just answer some really simple questions about YOUR money:

• Is your money being invested in the stock market?
• Are the stocks primarily in the U.S., or are they international?
• Is the fund invested in the bond market? Or annuities? Or real estate? Or your own company’s stock?

It’s common for companies to offer target date funds, which, basically, are managed according to an asset allocation appropriate for your age. As you move from your 20s to your 30s, to your 40s, target date funds will adjust their portfolios. Just because your 401 might be invested in a target date fund, however, doesn’t mean you shouldn’t at least be aware of the current allocation.

The Boring Glory Of Index Funds

Your best bet is to buy something called an index fund and keep it forever. Index funds buy every stock or bond in a particular category or market. The advantage is that you know youll be capturing all of the returns available in, say, big American stocks or bonds in emerging markets.

And yes, buying index funds is boring: You usually wont see enormous day-to-day swings in prices the same way you may if you owned Apple stock. But those big swings come with powerful feelings of greed, fear and regret, and those feelings may cause you to buy or sell your investments at the worst possible time. So best to avoid the emotional tumult by touching your investments

Recommended Reading: When Can I Transfer My 401k To An Ira

Worst Funds For 401 Plans

Sometimes the best choice is to avoid the worst choices. As a fiduciary, employers are wise to avoid placing funds in a 401 plan that can have big declines in price during a short period. Also, if you are the employee, and your 401 plan includes some of these options, proceed with caution, and make sure you fully review the option before choosing it as part of your investment plan.

Talk With An Investment Pro About Your Roth 401

If you want to learn more about your Roth 401 or other investing options, find an investing pro in your area. A financial advisor can help you understand your investments and make confident decisions.

A do-it-yourself approach to investing is never a good idea. Even the pros work with a financial advisor! Your familys future is way too important to wing it.

Looking for a qualified investing pro? Try the SmartVestor program! Its a free way to find top-rated financial advisors near you. Start building a relationship with an investing pro who understands the financial journey youre on.

Also Check: How Much Tax On 401k Withdrawal

Types Of 401k Plans: Which One Is Right For You

Use a retirement calculator to choose the best plan. You and Your 401K

If your employer offers a 401k plan, experts generally agree that you should be taking advantage of it and making contributions from each paycheck toward your retirement savings. However, not all employer-sponsored retirement plans are alike. Many employers offer what is considered a traditional 401k, but there are also safe harbor 401k plans, SIMPLE 401k plans, Roth 401k plans and 403b plans.

Keep reading to find out about which 401k plans might be available to you, the pros of cons and each, and how to determine if a 401k plan is the right choice for you and your retirement planning and saving goals.

What The Best 401 Plans Do

Like pro athletes, the best 401 plans all share some key features. They are top performers for a reason.

According to a recent “Best in Class” survey by plansponsor.com, the most highly rated plans make an effort to provide the best funds at the lowest cost.

This is a summary of what the best plans do:

Getty

Getty

— High participation rate. Employers who care about their employees get nearly every one of them in a plan: 95% participation vs. less than 80% for all other plans.

— Smart Investment Choices. Nearly all of the plans offer low-cost index funds, managed accounts and Roth options.

— Easy Enrollment and Auto-Contributions. All of the best plans automatically enrolled employees in their plan, bumped up their contributions when they got raises and offered eligibility within three months of starting a job.

— Financial Education Offered. From 88% to 94% of the plans surveyed, investing basics and saving/budgeting skills were presented. More than half of the plans gave advice on college savings and credit/debt management.

How does your 401 plan stack up? If it’s not performing well or doesn’t emulate some of the top plans, then you can ask your employer to upgrade it. Here’s what I suggest:

1) Find a low-cost provider. Nearly all of the top fund groups can provide an array of services.

2) Stock your plan with the cheapest index funds. Here’s a simple rule of thumb: Choose funds with single-digit expense ratios.

You May Like: What Do I Need To Rollover My 401k

Who Is Eligible For A Roth 401

If your employer offers it, youre eligible. Unlike a Roth IRA, a Roth 401 has no income limits. Thats a fantastic feature of the Roth option. No matter how much money you earn, you can contribute to a Roth 401.

If you dont have access to a Roth option at work, you can still take advantage of the Roth benefits by working with your investing pro to open a Roth IRA. Just keep in mind that income limits do apply when you contribute to a Roth IRA.

Vs Roth : How Are They Different

The biggest difference between a traditional 401 and a Roth 401 is how the money you contribute is taxed. Taxes can be kind of confusing , so lets start with a simple definition and then well dive into the details.

A Roth 401 is a post-tax retirement savings account. That means your contributions have already been taxed before they enter your Roth account.

On the other hand, a traditional 401 is a pretax savings account. When you invest in a traditional 401, your contributions go in before theyre taxed, which makes your taxable income lower.

Roth 401 vs. Traditional 401: Pros and Cons

Recommended Reading: What Age Can I Start Withdrawing From My 401k

S To Creating Your Retirement Plan

Even if its a long way off, think about what you want your money to do for you when you retire.

Maybe you want to pay off your mortgage, help your grandkids with college expenses, camp in your 10 favorite national parks, or start a new hobby you havent had time for during your working years. If you can picture what you want retirement to look like, its easier to plan for it.

Tip: Refresh your memory by looking at retirement-related goals you set when you created your financial plan.

No matter what your goals are, saving and planning now is a smart idea, so lets walk through five steps to helping you create your retirement plan. to log your numbers as you go.)

Investment Options: The Diy Approach

Target-date funds arent for everyone, and some prefer to adopt more of a hands-on approach. You typically cant invest in specific stocks or bonds in your 401 account. Instead, you often can choose from a list of mutual funds and exchange-traded funds . Some of these will be actively managed, while others may be index funds.

So what kinds of funds and investments can you expect to see?

You can bet that almost every plan will have large-cap stock funds. These are funds made up entirely of large-cap stocks, of stocks with a market capitalization of over $10 million. Large-cap stocks make up the vast majority of the U.S. equity market, so your 401 will almost certainly have multiple funds to choose from that invest in them. Notable large-cap funds include the Fidelity Large-Cap Stock Fund and the Vanguard Mega Cap Value ETF .

Another type of mutual fund youll likely find in your 401s catalog of option is a bond fund. A bond fund is a mutual fund that invests solely in bonds. Within this category exists several categories like corporate bond funds, government bond funds, short-term bond funds, intermediate-term bond funds and long-term bond funds. Bond funds are popular because, as a general rule, they provide the safety of investing in bonds, but theyre much easier to buy and sell than individual bonds. Still, bonds arent risk-free: Longer term bonds can be hurt by rising interest rates, and so-called junk bonds are at risk of default.

Also Check: How Much Does A Solo 401k Cost

What Are The Rules For A Roth Ira

Roth IRAs are only available to people making less than $129,000 a year as an individual, or $191,000 for married couples. They have contribution limits of $5,500 a year, or $6,500 for those over 50. Unlike 401ks and traditional IRAs though, there’s no penalty for withdrawing part of your contribution early.

Retirement Accounts For Small

According a 2020 Bureau of Labor Statistics report, 33% of workers don’t have access to a workplace retirement plan. At companies with fewer than 100 workers, roughly half of employees are offered a retirement savings plan.

If you work at or run a small company or are self-employed, you might have a different set of retirement plans at your disposal. Some are IRA-based, while others are essentially single-serving-sized 401 plans. And then there are profit-sharing plans, which are a type of defined contribution plan.

Main advantages of plans for the self-employed:

• Plans for contractors, the self-employed and small-business owners have higher contribution limits than most employer plans and IRAs.

• These plans often offer more investment choices than employer-sponsored plans, such as 401s.

• Many of these plans are easy to set up and therefore not much of a burden on the employer that’s you, if you’re a small-business owner.

• You might be able to set up your account at a financial institution you already use.

• If you’re self-employed, you can give yourself a generous profit-sharing contribution, plus make your elective deferral with catchup as the employee.

Main disadvantages of plans for the self-employed:

Read Also: Who Is The Plan Sponsor Of A 401k

The Best 401k Plans: See How Your Company Ranks

The most popular way to save for retirement is through a company sponsored plan like a 401k. But not all of these plans are created equally. Employers determine many of the features that make one plan better than another, like whether they match a certain amount their employees contributions, what investment options are available in the plan and how much of a bite investment and administration fees take out of their employees returns.

So how can you know whether your 401k plan is good, mediocre or scraping the bottom of the barrel? There are a tools available that will let you see how your companys 401k plan stacks up against other plans. Two of the best that are available for free are offered by Bloomberg and BrightScope.

Bloombergs 401K Analyzer:

If you want a quick analysis of your plan, then I suggest you try Bloombergs simple, but effective 401k Analyzer. They ask the question, How good is your 401? and walk you through just 11 questions to determine how your 401k ranks against plans offered by top corporations in the S& P 500. While this is not an exhaustive assessment by any means, their tool is engaging and easy-to-use.

Points are deducted if a companys match is paid at, or after year-end, if they make employees work for one year before receiving the company match or if matching funds must be used initially to purchase company stock.

Read: The Biggest and Costliest 401K Mistakes People Make and How To Avoid Them

BrightScope 401K Ratings:

Best Retirement Plans: Choose The Right Account For You

Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list ofour partnersandhere’s how we make money.

The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.

Gone are the days when workers could count on an employee pension plan and Social Security to cover their costs during those golden years. Today, pensions are a rarity and Social Security isnt a slam-dunk for future generations.

That’s why Uncle Sam wants needs you to save for retirement and is offering tax breaks on retirement accounts. Here’s how to to find the best retirement plans to save for your future.

You May Like: How To Claim Your 401k