There are a variety of vesting schedules your company may follow. You may be vested immediately or after working there for three years, or perhaps there is a gradual increase each year. Your employer can tell you about their vesting schedule. The reason companies set up 401(k)s in this manner is because they want the workers they hire and train to stay with them. If you haven’t been with your company long, you may not yet be vested in your account, and they hope that’s an incentive to stay with the company until you are. Your employer match will help your retirement account to grow. However, you may wonder if you can contribute above and beyond that match. The answer is yes—up to $20,500 in 2022 ($22,500 in 2023), with catch-up contributions of $6,500 in 2022 ($7,500 in 2023) allowed if you’re 50 or over. With a traditional 401(k), your contributions reduce your taxable income now, and you pay taxes on them later when you make withdrawals during retirement. In other words, it’s tax-deferred. With a Roth 401(k), on the other hand, you contribute after-tax dollars, but then your withdrawals in retirement are tax-free. However, both IRAs allow your investment earnings to grow tax-free over the years, meaning you don’t pay any capital gains taxes as you earn investment income each year. If you have between $1,000 and $5,000 in your 401(k), and you don’t choose to roll it over or receive the money, your former employer may deposit the money into an IRA for you. If you have less than $1,000, they may just cut you a check and withhold 20% for taxes. However, you can still roll over the distribution within 60 days. Your plan may also offer the option to invest in stocks, bonds, or annuities. Each has pros and cons, and your best decision will depend on how long you have to invest and what your goals are. If you have questions, ask your plan sponsor or human resources representative to give you an overview. Also, be sure to review your 401(k) statements regularly to understand how your investments are doing. Borrowing from your 401(k) should be a last resort. One way is to contribute to a Roth IRA or a traditional IRA. Plus, there are also other retirement options available if you are self-employed, such as a Simplified Employee Pension (SEP-IRA), solo 401(k), Savings Incentive Match Plan for Employees (SIMPLE IRA), Keogh account, or taxable investment accounts. You can start saving now, even with a small initial investment.
