Understanding Your Wealth
Getting a handle on your own retirement readiness starts with evaluating your current financial health – call it the starting point on your journey to retiring with confidence . We break down your financial picture into four discrete components : retirement assets , income , liabilities and expenses . When you understand these four components of your personal wealth , you can start putting together a plan toward achieving the retirement you want .
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INCOME
ASSETS
EXPENSES
LIABILITY
Assets
Your retirement assets are the financial resources you ’ re bringing to support yourself in retirement – the money you ’ ll live off of in your golden years . For most people , these will be what are known as qualified retirement accounts , such as an IRA or 401 ( k ), though your personal savings and certain tax-free accounts could be included here too . Let ’ s take a closer look at each of these .
QUALIFIED RETIREMENT ACCOUNTS
Qualified retirement accounts are investment accounts that provide certain tax benefits when used toward retirement . The most common are defined contribution plans ( such as 401 ( k ), 403 ( b ) or employee stock ownership plans ) and individual retirement accounts , or IRAs . They both operate on the same basic principle – money is invested on your behalf and , so long as certain Internal Revenue Service rules are followed , can be withdrawn as needed while providing tax advantages along the way . The specifics around how and when you can withdraw funds from these accounts and the tax advantages will vary per plan , as do the penalties for early withdrawals
401 ( k ) s and Other Defined Contribution Plans You might be familiar with a retirement plan known as a pension , where a business will pay a retired employee a monthly stipend for the rest of their life based on factors like how long the employee worked at the company and their annual earnings . ( Pensions will be covered later in this guide , when we talk about Income .) In the 1980s , companies started to phase out defined benefit plans like pensions and replace them with defined contribution plans like 401 ( k ) s .
Unlike a defined benefit plan , a defined contribution plan does not promise a monthly retirement benefit . Instead , both the employee and employer can contribute to the employee ’ s individual retirement account , and those dollars are invested on the employee ’ s behalf . Over time , these accounts are intended to grow through additional employer / employee contributions and potential investment gains into a valuable retirement nest egg . 401 ( k ) s are the most popular defined contribution plan in the private sector ; other defined contribution plans include 403 ( b ) plans , employee stock ownership plans and profit-sharing plans .
Defined contribution plans allow your contributions to grow tax-deferred , which is to say that taxes are not applied to either the employee contributions ( which the employer withholds from your paycheck pretax ) or on the growth of the investments . Taxes are only paid once money is withdrawn , ideally ( but not exclusively ) during retirement . There are also many federal regulations specifying how much you can contribute to a defined contribution plan , the circumstances under which you can withdraw and any penalties for withdrawing early .
Divorce and Widowhood Funds contributed to a defined contribution account during a marriage are typically considered marital property – unless there is an existing prenuptial agreement stipulating otherwise , each divorcing spouse is entitled to half of the value of the account . A divorce is one of the few instances that allows you to access your 401 ( k ) early without a tax penalty .
In the event of the death of a defined contribution account holder , the funds will be directed to the designated beneficiary of the account . ( The beneficiary is named when the account is set up but can be changed at the behest of the account holder .) If you are the designated beneficiary , you can withdraw the money from the account ( and pay whatever taxes are due ), roll the account over into an IRA , move the money into what is known as an inherited IRA or simply decline it .
Individual Retirement Accounts ( IRAs ) Fortunately , tax-advantaged retirement plans are not limited to just those offered by businesses to their employees . You
Strategies for Maximizing Your Defined Contribution Plan
• Take advantage of the employer match . Many companies will incentivize employees saving for retirement through an employer match program , where they will match a portion of what the employee contributes . ( For example , the program might stipulate that for every dollar the employee contributes to their 401 ( k ), the company will match it , up to $ 5,000 .) This is free money that can boost anyone ’ s nest egg .
• Make catch-up contributions . The IRS allows individuals aged 50 or older to make annual catch-up contributions to many defined contribution plans , including 401 ( k ) s . This could be an opportunity to make up for time out of the workforce or for periods where you weren ’ t able to save as much for retirement .