Unlike our parents and grandparents, it is an anomaly for your employer to offer a defined benefit plan or pension unless you are a federal government or state employee. If you are not offered a pension plan, you should contribute as much as possible to your 401(k) plan, and hopefully still be able to meet all of your financial needs.
With each defined contribution or 401(k) plan, you can contribute both pre-tax and after-tax. This after-tax contribution is also known as a Roth contribution (not to be confused with a Roth IRA). The amount that you can contribute pre-tax in 2014 is $17,500, and the annual contribution limit is $52,000. This amount includes $34,500 of after-tax money. In addition, employees over the age of 50 may contribute an additional $5,500 pre-tax to their 401(k) plan.
The appeal of contribution to a 401(k) plan is that it gives you the opportunity to make pre-tax contributions up to $17,500. This means that income tax will not be withheld on these contributions and these contributions will lessen your annual income tax liability. Furthermore, many employers also have matching provisions and safe harbor elections they must make to ensure these plans remain qualified. Lastly, 401(k) plans allow for investments to compound and grow tax deferred. This means that you will not have an income tax liability on distributions and dividends received from investments in your retirement account.
It should be everyone’s goal to at least fund the elective deferral amount to their employer’s 401(k) plan, and in 2014 this is $17,500. However, for many this is a lot of money, so we believe contributing at least 10-15% of your gross salary should be the minimum at which you should save. It is a very simple mantra, but something is better than nothing.
When we review your 401(k) plan, we first determine if your employer offers a matching provision, and then we determine how much you can afford to contribute based on your cash flow and financial profile. After these steps have been determined the last step is we analyze the mutual fund offerings on your employer’s 401(k) plan and pick the investments best suited for your overall portfolio allocation and success for long term growth.