Time and time again, that old saying your dad used all the time is proven right.
You often don’t know what you don’t know.
It’s been proven true for everything from fixing cars to saving money.
As a high-earning individual, you likely have a robust plan in place for your finances. You save for retirement, invest for your childrens’ futures and are familiar with the concept of a diversified portfolio.
But there’s always more to learn – especially when it comes to retirement planning. To help you get started, we’ve rounded up six basic questions on 401(k)s to help you get set up for success.
Six FAQs on 401(k)s for High-Earners
Deciding to participate in a 401(k) plan is only the first step – let’s explore what else you need to know.
1. How much do I contribute?
We generally recommend maxing out whatever your company’s 401(k) match rate is. If you can do more, that’s great! But if you don’t max out the match, you’re leaving free money on the table.
Remember that those under 50 years old in 2024 can contribute up to $23,000, and those 50 or older can contribute up to $30,500. Your employer match policy will be specific to the company for which you work.
2. When do I contribute?
While it may be tempting to max out your contributions at the beginning of the year to get it over with, your company’s matching policy might make it worth your while to wait. If your company matching accrues proportionally with your income throughout the year, that Christmas bonus could end up giving your 401(k) a nice end-of-year boost.
Check with a professional before you make any decision, but we generally recommend spreading out your contributions for the whole year.
3. Does my plan offer Roth contributions?
Some 401(k) plans offer Roth contributions. These plans, known as Roth 401(k)s, combine features of a traditional employer-sponsored plan and a Roth IRA. In short, while a traditional 401(k) is built with pre-tax dollars, a Roth 401(k) uses post-tax dollars, meaning the money in your account won’t be taxed when you need it down the line.
To know whether your plan offers Roth contributions, you’ll need to speak with your company’s benefits administrator.
4. Do I make Traditional (pre-tax) or Roth (after-tax) contributions?
Choosing pre-tax or after-tax contributions depends on your immediate and long-term financial goals. Your financial advisor will likely want to look at your current tax bracket, retirement plan and other financial information before making a recommendation.
In many cases, a combination of the two is a great way to optimize your contributions.
5. How should I invest our retirement savings?
Your investment decisions should be based on a number of factors, including:
- When you want to retire
- Where you want to retire
- How you want to retire (i.e., what are your lifestyle requirements?)
- Your personal values
- And more
In general, investing in a diversified portfolio (a variety of investments) lays a foundation that can be more reliable and protect you against risks.
6. What are the fees associated with different investment options?
Retirement accounts like 401(ks) might include administrative fees or management fees, among others. In some cases, your employer may offer to cover all or a portion of such expenses.
Keep in mind that beyond the base 401(k) plan options, there may be other savings options available after you’ve reached your maximum 401(k) limit. Many high-earners are eligible for additional after-tax contributions, for example. Even more beneficial, these amounts can later be distributed into a rollover Roth account upon leaving your employer.
With these six questions answered, you can be better prepared to save for your future retirement with confidence. And should you need further guidance or clarification, feel free to reach out to our team.
Plan for Your Future
The advisors here at Paradigm can help you craft a retirement plan based on your unique needs and goals. Click here to get started today.