Your Complete Guide to 401(k) Retirement Accounts

Most people know they should save for retirement; however, using a 401(k) may seem too overwhelming or complicated and prevent many from getting started. When I was in my 20s, I didn’t invest in my company’s 401(k) because I wasn’t sure what would happen if I left my job. Not understanding the retirement account rules held me back, and I don’t want that to happen to you. 

While 401(k)s come with critical IRS regulations you should know, they’re not as tricky to master as you might think. If you’re lucky enough to work for an employer offering a 401(k), participating can be a powerful way to build wealth for retirement. 

In this guide, I’ll cover everything you need to know about 401(k)s, so you can accumulate a healthy nest egg and have a secure financial future.

What is a 401(k)?

In simple terms, a 401(k) is an employer-sponsored account for workers to save money for retirement. However, if you’re self-employed, you can have a solo 401(k).

The two main types are traditional and Roth. With a traditional 401(k), your employer (or you, if you’re self-employed with a solo 401(k)) deducts contributions from your paycheck before taxes get withheld and deposits them in your account. You defer paying tax on your deposits and investment earnings until you take 401(k) distributions in retirement. 

If you don’t qualify for a Roth IRA because your income is too high, a Roth 401(k) or solo Roth 401(k) are great options because they have no income limits.

With a Roth 401(k), your employer deducts contributions from your paycheck on an after-tax basis and deposits them in your account. While you must pay tax upfront on contributions, your withdrawals of deposits and earnings in retirement are entirely tax-free. 

Can You Contribute to a 401(k) and an IRA in the Same Year?

What is 401(k) matching?

One of the most valuable benefits of participating in a 401(k) is that your employer may incentivize you by paying a match, which is free money. For instance, your company could match 100% or 50% of your contributions up to a specific limit. 

Let’s say you earn $50,000 a year and get a 50% employer match up to 6% of your salary. If you save $3,000 in your retirement account, your employer will deposit $1,500. That’s an instant 50% return on your investment. Not bad, right? 

Now let’s say you get the full $1,500 match year over year for the next 30 years. You’d have an extra $127,202 in your account to spend in retirement. And that’s a conservative estimate because it doesn’t account for potential increases in your wages.  

Vesting prevents you from owning matching funds until you’ve been employed for a set number of years. That means if you leave your job, you could forfeit some of all of your matching funds.

There’s one catch you should know about 401(k) matches: Some employers impose a vesting schedule. Vesting prevents you from owning matching funds until you’ve been employed for a set number of years. That means if you leave your job, you could forfeit some of all of your matching funds. 

However, there’s never a vesting schedule for the contributions you make from your paycheck. You always own 100% of the funds you deposit in a 401(k) and can never lose them if you change jobs or get fired.  

Should You Invest in a 401(k) with No Matching?

What are the 401(k) contribution limits?

For 2022, you can contribute up to $20,500 to your 401(k), or up to $27,000 if you’re over age 50. These limits have been increased by $1,000 from 2021. 

Also, note that the annual contribution limit doesn’t include any employer matching. So, if you contribute $20,500 and your employer adds $2,500, it’s icing on the cake! 

Can you take 401(k) withdrawals?

Since the purpose of a 401(k) is to invest for retirement, there are rules against taking withdrawals before age 59½. If you tap into your 401(k) early, you typically must pay income tax plus a 10% early withdrawal penalty. 

However, there are penalty exceptions. For instance, the Rule of 55 says that you can take distributions penalty-free if you leave your job after age 55. That’s excellent news if you want to retire early. However, you still must pay income tax on withdrawals that weren’t previously taxed. 

Additionally, you can skip the early withdrawal penalty for qualified hardships, such as becoming disabled, paying for education expenses, or avoiding foreclosure on your primary residence.

Once you reach age 72, you must begin taking required minimum distributions (RMDs) from a 401(k). The amount depends on the balance in your account and your life expectancy defined by IRS tables. RMDs that weren’t previously taxed get included in your taxable income.

Should You Take a 401(k) or 403(b) Withdrawal?

Can you take 401(k) loans?

Another option to withdraw from your 401(k) is a loan—if your plan permits it. While it can be tempting to borrow from yourself, be sure you understand the following:

  • You typically must repay a 401(k) loan within five years.
  • Your 401(k) loan payments get deducted from your paychecks.
  • You must repay interest on 401(k) loans to make up for lost investment time.
  • You can’t take a 401(k) loan that exceeds $50,000 or 50% of your vested account balance, whichever is less.
  • You may get prohibited from making new contributions while repaying a 401(k) loan, leaving you unable to enjoy investing growth and employer matching.

10 Pros and Cons of 401(k) Loans You Should Know

What happens to a 401(k) if you leave a job?

If you leave your company, you can no longer make any new contributions to your old employer’s retirement plan. However, it’s easy to take your vested 401(k) balance with you. 

Here are five options you have for your 401(k) when leaving an employer:

  1. Cash it out.
  2. Leave it with your ex-employer. 
  3. Roll it over to an IRA.
  4. Roll it over to a 401(k) with a new employer.
  5. Roll it over to an account for the self-employed.

Most people choose to do an IRA rollover with their old 401(k) to have more control over their investment options and fees. But if you have a new job with a retirement plan or become self-employed, moving funds to a new 401(k) or solo 401(k) are also excellent options.

The worst option for an old 401(k) is cashing out because it’s an early withdrawal if you’re younger than 59½. You’d have to pay income tax plus the hefty 10% penalty, leaving you with significantly less money.

How to start investing in your 401(k)?

If your employer offers a 401(k), you may already be enrolled and not know it! Many companies auto-enroll new employees to encourage participation. You can review your last paycheck or contact your benefits administrator for more information.  

If you already have a 401(k), log on to your online portal to adjust your contribution amount, choose investments, and see your employer match. Most plans offer a diversified investment menu that includes mutual funds, exchange-traded funds, and money market funds. 

Target date funds are a mutual fund type that’s become popular in 401(k)s. They allow you to select a fund based on the date you expect to retire.

Target date funds are a mutual fund type that’s become popular in 401(k)s. They allow you to select a fund based on the date you expect to retire. Then the fund automatically adjusts its underlying investments to be more conservative as the date approaches. 

If you don’t understand your 401(k) investment choices or need help selecting appropriate funds for your financial objectives, speak with a financial advisor. Many 401(k)s offer free or low-cost guidance for plan participants.

Some 401(k) plans include auto-escalation, which automatically increases your contribution rate over time (such as 1% per year) until you hit a limit. That’s an excellent feature for slowly building your savings rate over time. 

What are the advantages of a 401(k)?

Here are several pros for using a 401(k) to invest for retirement:

  • Many employers offer a 401(k) matching program that incentivizes you to save by making free contributions on your behalf. 
  • You reduce your tax bill by making traditional 401(k) contributions. 
  • You get tax-free withdrawal in retirement if you have a Roth 401(k).
  • You own your vested 401(k) funds and can take them with you when you leave a job.

What are the disadvantages of 401(k)s?

Here are a few cons for 401(k)s:

  • Not all employers offer a 401(k) retirement plan.
  • You typically can’t tap a 401(k) before age 59½ without paying an early withdrawal penalty.
  • You may pay higher investment fees compared to other types of retirement accounts, such as an IRA.
  • You may have fewer investment options than with an IRA (however, some might see that as a benefit). 

Use a Compound Interest Calculator to see how much your 401(k) could grow!

What questions do you have about 401(k)s and other retirement accounts? Let me know by leaving me a voicemail at 302-364-0308. Want to keep in touch? Follow me on Instagram or sign up for my weekly newsletter at


How to Get into the Stock Market

Are you interested in getting involved in the stock market? Do you feel like you have no idea where to start? If so, you are like plenty of other people before they embark on this exciting and potentially lucrative pastime. Whether you are looking for a place to passively park your money and wait for it to grow or you have shining dreams of day trader glory, you can get started with just a little bit of money and expertise.

Choose your approach

If you have a retirement account, you might already be an investor in the stock market. And you may want to continue being this type of investor, one who is largely hands-off. Many people will tell you this is the best approach, and it's true that over the long run, an array of investments in the stock market will almost certainly increase in value even if there are fluctuations over a shorter period of time.

You can use digital tools for personal finance to monitor your growth over time.

However, you may also want to take a more hands-on approach. The first things you'll need to decide is if you want to manage your portfolio yourself or if you want someone else to do it for you. Neither of these is inherently better than the other. What's important is that you choose the approach that you know will work for you. Of course, you could also change over time. You might start out with more professional help and start doing more of the work yourself as you learn more.

Choose your account

It used to be that when you wanted to start investing, you went to a full-service broker who would work with you in developing a long-term financial plan and help you create the kind of portfolio that would be right for you based on a number of different factors. These types of professionals are still around, and you can still engage their services although they will cost more than online brokers. Online brokers mean that anyone with an internet connection can start investing today, even if you only have a little money. You'll need to decide whether you want to do it yourself or have a robo-advisor do it for you. The former will require you to research and learn as much as possible about investing. The latter will gather information about your goals and make choices for you.

Paper trading and DSPPs

Before you move forward, there are a few other options you might be interested in learning about. First, you may want to look into paper trading. This is essentially an opportunity to practice being in the market without actually spending any money. You can learn a lot by spending some time paper trading, and it may help you decide whether you want to manage things on your own or let a broker or robo-advisor do so. There is also something called a Direct Stock Purchase Plan that allows people to make a purchase directly from a company. These are usually blue-chip companies, and you generally must go through a third-party administrator. If there is a company you are interested in, you can talk to their investor relations department about a DSPP.

Day trading and penny stocks

Some people get involved in stocks in the first place because they have visions of getting rich as a day trader. Can you make a lot of money as a day trader? You absolutely can. The flip side of this is also that you can lose a lot of money, so you need to be prepared before you stride into this world. This is a high-risk, high-reward endeavor. To get started, you will need to have money that you can afford to lose. You should also have a good understanding of the market in addition to being able to read and analyze data and charts. You'll need to be disciplined. There are many different types of strategies you can use, such as high-frequency trading, which involves algorithms, or news-based trading, which involves watching current events and making trades based on them.

One potentially risky area that may interest some day traders is penny stocks. These are very low-priced stocks that offer a potential of a substantial return. However, the very volatility that can earn you a lot of money also means you could potentially lose a lot. Some of these are failing companies, but others are simply new and could do very well.

You can review a watch list that will list some of the best penny stocks to buy to have an idea where to start.

Regular investing

If, like most people, you aren't interested in day trading, you'll want to move ahead with either your broker, your robo-advisor, or your online account that you manage yourself. You can either buy individual stocks, or you can purchase exchange-traded funds and mutual funds. It's generally advisable to have a diverse portfolio, and this is easier if you choose mutual funds or exchange-traded funds. You can also build a diverse portfolio from individual shares, but you will probably spend more money doing so. However, with individual shares, there is more of a chance of a quick rise in value. You may be limited by what you initially have to spend. For example, mutual funds may require a minimum of $1000 or more, but you can purchase exchange-traded funds for much less, even as little as under $100.

Whatever your plan, you should take a look at your portfolio a few times a year and make sure it still reflects your goals.

How you select your investments will depend on many different factors, including your age, your goals and your tolerance for risk. The standard advice is that younger people can afford riskier investment than older people since there is more time for course correction, but there are 20-somethings who may temperamentally lean toward the more conservative choice and 50-somethings who might have an appetite for risk. The advice is generally to focus on the long term since this is usually the way value accumulates, slowly and steadily. However, you may decide you want to be more hands on, and whatever your plan, you should take a look at your portfolio a few times a year and make sure it still reflects your goals.


Executor vs. Administrator: Key Differences

A female administrator of an estateWhen someone dies, everything that he owns becomes known as his “estate.” This estate is the sum total of assets, debts and property owned and owed by the decedent (a legal term for the person who died). Someone has to manage these assets and make sure they get to the right place. That someone is known as either the executor or the administrator. Consider working with a financial planner as you create or update an estate plan.

A Note On State Laws

It is important to note at the outset that laws covering estate planning, like property law, is extremely state-specific. As a result this article will only discuss the subject of executors and administrators from a very general perspective. Most states share the same general definition for these roles, and most appoint them using similar procedures. However, beyond that the details will vary widely. And some states don’t even share the same general principles.

What Is an Executor?

Executors and administrators both manage the estate and assets of someone who has died. Typically these roles share largely the same rights and responsibilities.

An executor (or executrix for females) is someone who has been named in a last will and testament to administer the decedent’s estate.

Overall, the job of an executor is to ensure that the decedent’s estate is protected and distributed to all legal heirs. Depending on the size of the estate this can be a complicated job, but most of the time it requires a few main responsibilities:

  • Gather or identify the decedent’s assets and preserve them intact;
  • Pay any debts and taxes that the decedent still owes;
  • Distribute the estate according to the terms of the will; and
  • To the extent that the estate cannot be fully distributed based on the terms of the will, identify any existing heirs and distribute the remainder of the estate.

For someone who has a simple estate or a simple will, this process can be very straightforward. However, this isn’t always the case. Often an executor will have to divide up property or find missing assets based on the terms of the will. In other cases the executor will have to sell off assets in order pay off remaining debts or taxes. This process can take a significant amount of time and effort depending on the size of the estate.

Usually the biggest challenge for an executor is ensuring that the estate is distributed according to the terms of the will. If the decedent made a complicated will or set conditions under which different heirs can inherit, this can lead to a lengthy process of determining exactly who is the legal heir for any given asset. If someone challenges the will, the executor is responsible for defending it (or seeing that it is defended).

An executor will usually receive compensation for their time. Typically this compensation is written into the will. In many places, if the will does not provide for specific compensation, state law allows for executors to claim statutorily approved rate of compensation.

What Is an Administrator?

Estate planning documents

An administrator serves the same role as an executor. They manage the assets of someone who has died and see that those assets go to the legal heirs. The biggest difference is that an administrator is appointed by the probate court in cases where someone dies without a will. (This is known as dying intestate.) Since they have died without a will, the decedent could not name an executor. So instead the court appoints an administrator to handle things.

An administrator’s job is technically identical to that of an executor: gather the estate’s assets; pay off any debts; distribute the remainder among the legal heirs.

The main difference is that, because an administrator does not have a will to work from, they must base their decisions on statute. An administrator is first and foremost responsible finding any potential heirs. This can be difficult as, in many cases, people may not have known that a relative has died or may not have even been in contact.

Then the administrator must determine who is legally entitled to which portions of the estate and distribute the property accordingly. In case anyone challenges their inheritance, the administrator is responsible for defending the issue.

Like an executor, an administrator is entitled to reasonable payment for their time. The details of those compensation schemes differ between states.

The Bottom Line

An estate executorAn executor is someone who has been named in the will to manage your estate after you die. An administrator is someone who takes charge of your estate if you die without a will. Keep in mind that estate law is state-specific. While most states share the same general practices there are few, if any, federal laws that govern estates and inheritance. It is important to consult a local attorney before making any decisions on your own assets and estate.

Tips on Estate Planning

  • Planning for after you’re gone is never pleasant, but if you have a family it’s absolutely essential. Working with a financial advisor is the wisest way to go about this. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.
  • Estate taxes can be hefty, but you can maximize inheritance for your family by gifting portions of your estate in advance to heirs, or even setting up a trust.
  • Some inherited assets can have tax implications. Before you spend or invest your inheritance, read more inheritance taxes and exemptions.

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