As you grow old, you start thinking of retirement and saving money for those years to live a peaceful life without depending on others. Due to curiosity and requirements, you must have heard about 401(k), a popular retirement plan.
This retirement savings account has many intriguing aspects which may be oblivious to people. Here is a quick recollection of them.
2023 maximum contribution limit
Employer-sponsored plans can limit how much you can contribute from your income. In 2023, you can contribute USD $22,500 to this account. Last year, the limit was USD $1,000 less. A catch-up contribution of up to USD $7,500 is available for people aged 50 and more. That means they can add USD $30,000 to their plan. Interestingly, IRS says you can put 100% of your earning into this plan type with a maximum of USD $22,500, or USD $30,000 as relevant. Suppose your income is USD $50, 000. In that case, you can put USD $22,500 of your first earning into the account.
Other retirement plans
With a typical 401(k) plan, you can also open other retirement savings accounts, as the maximum contribution limit is USD $66,000 in 2023. That means you may still have USD $43,500 to put into other accounts apart from the USD $22,500 you invest in your 401(k) plan. However, there is a way to approach this. Roth and traditional IRAs are the standard plan types. You must follow specific regulations if you invest in a 401(k) account. For instance, a traditional IRA allows you to contribute no matter how much you earn, but it can be tax deductible only if it is less than or equal to USD $116,000 (joint filing) and USD $73,000 (single person). Roth IRA doesn’t allow you to invest money once your income reaches a certain level.
If you plan to quit your job and worry about the savings you made so far in your employer-sponsored retirement account, don’t worry and explore the option of rolling over funds into your Solo 401(k). Solo 401(k) allows you to contribute about USD $66,000 of your income. For this plan, check solo401k.com. Other options include SEP IRA and SIMPLE IRA. These are self-employed plans for small business owners.
The common belief is that 401(k) plans have loan provisions, while the ultimate decision may depend on your employer. Some employers don’t offer the loan, and this is not a rule violation. They can make this choice. If you are self-employed, you can apply for a loan on your Solo 401(k), though. The maximum loan amount can be up to USD $50,000. Your plan provider can guide you on this.
As per IRS rules, you can withdraw money from your retirement plan early without penalty if you apply for a hardship loan. And this is possible if you need funds for your first home purchase or higher education. Generally, withdrawing a sum before maturity leads to a 10% penalty. Furthermore, you cannot keep funds forever in a 401(k) account because of the required minimum distributions (RMDs) provision. The only exception is the Roth IRA. Under RMD, you must start withdrawing your fund from age 70 ½. The distribution limit increases with your shrinking life expectancy as you age. If you do some business or side gig after 70 ½, you cannot contribute to your 401(k). However, you will also not have to worry about RMDs too.
If you are an entrepreneur or a small business owner, you can try the Solo 401(k) option for its unique advantages. Talk to your plan provider for help.