7 Things You Didn’t Know About Your 401(k) / IRA [Updated!]

6 things you didn't know about your 401(k)/IRA

For many of us, the 401(k) and IRA investment worlds are confusing. Investing seems extremely complex and everyone has a different opinion on how to invest and how much you should be saving. Today I aim to clear up some of the lesser-known facts about your 401(k) or IRA plan.

1. An Employer Match Is Free Money!

If your employer offers a 401(k) or IRA, make sure to find out if they offer any type of a match. Employers that offer a match on retirement contributions do so in different ways. Some will match a flat percentage up to a certain amount (i.e. 3% or more). Another common match is 50% of your personal contributions up to 6% of your salary.

Check with your Human Resource representative to find out what your employer offers. If they match 3%, you need to be contributing the full 3% of your salary to get a 100% return on your investment. By only investing 3% of your salary, you really are investing 6% with the match!

Take advantage of the free money and ensure you aren’t leaving any 100% returns on the table.

2. Compound Interest And Time Are Your Best Friends

When you first start investing in a 401(k) or IRA, it can be frustrating. If you make an 8% return on the $1,000 you have invested,  that’s only $80 dollars. Not very impressive when you look at it.

The magic is difficult to see when you start investing. However, give it some time and the compound interest will start to snowball out of control. When you save up $100,000 dollars in your account, suddenly that $80 dollars turns into $8,000 without any effort from you.
Here is a quick visual to show you how compound interest and time work together to make you rich.

compound interest will make you rich

As you can see from the above chart, the snowball aspect of compound interest is amazing! The bottom right indicates the largest nest egg at $1.8 million. To get there, you would need to invest $15,000 for 30 years. If you did that, you would only have invested $450,000 of your own money. That means the other $1,350,000 is money you earned in interest!

3. In 2022, You Can Contribute $20,500 To Your 401(k) And $6,000 To Your IRA

2022 started the year off with an increase in contribution limits. Both the IRA and 401(k) limits increased $500 dollars to even out the numbers. If you are a great saver, this was music to your ears!

But wait, there’s more! Did you know that if you turn 50 this year or are over 50, you can put even more money into your retirement accounts? It’s true – if you are 50 or over, you can contribute an extra $6,500 a year to your 401(k) for a total of $27,000! If you are contributing to an IRA, the catch-up limit is an extra $1,000 this year for a total of $7,000!

4. Different Funds Charge Different Fees

different funds charge different fees

All funds within your 401(k) or IRA are not created equal. Each fund you invest in charges a different fee. Some charge fees that are extremely high compared to the other funds. These fees are usually referred to as an “expense ratio.”

For instance, most index funds charge around .06% or less per year. However, other mutual funds may charge up to 1% or more to actively manage your money. If you don’t pay attention to the expense ratios of your funds, you could easily be spending tens of thousands of dollars in unnecessary fees.

free budget printable

5. Your Money Is Off-Limits Until Age 59 1/2

A 401(k) is a long-term retirement investment. While technically you can make a withdrawal from your 401(k) retirement before the age of 59 1/2, you should avoid this at all costs. If you pull it out before then, you will have an extra 10% tax penalty taken out of it. Giving the government this extra money should be a crime in itself so convince yourself it’s untouchable.

There is one exception to the 59 1/2 rule. If you retire in the year you turn 55 or older, the 10% penalty will not apply. However, if you retire at age 54, you will have to wait until you are 59 1/2 to avoid the early withdrawal penalty.

If you have an IRA, there are more ways to pull your money out before you are 59 1/2. Refer to this article if you are interested in learning about withdrawing from your IRA without penalty. I would advise against it though!

I also wrote an article on Using Your 401k To Pay Off Debt / Pros And Cons. Check it out for more information!

6. Roll Over Is The Best Option

If you have worked for more than one company you may have several 401(k) accounts with varying balances. There are several options available for your 401(k) after you leave a company.

You could take the money as a lump-sum cash payment, you can leave it in the employer’s 401(k) program, you can roll it over into an IRA, or you may be able to roll it over into your new employer’s 401(k) program.

The best option is to roll your 401(k) over into another tax-sheltered investment option. Fight the urge to pull that lump sum out and go on a spending spree. We are talking about your retirement, not an easy way to buy a boat.

When you roll over the money, do not accept a check from the previous 401(k) plan. Have them direct transfer the funds over so you don’t get stuck paying any extra taxes.

7. You Can Change Your Investments

One of the most common things people with a 401(k) or IRA don’t realize is that they can change their investments. Whether you want to increase your risk tolerance or diversify your portfolio, it’s essential to know that you have control over how you manage your money. You can research things like how can I transfer my 401k to gold without penalty or the best way to invest in my 401(k), and then change your investments accordingly. 

Knowing what your options are and being proactive about your retirement planning can go a long way in ensuring a comfortable future. Whether you want to make a significant change or just tweak your current strategy, it’s vital to know that your retirement savings are always in your hands.