Getting to Know Your 401K

Getting to Know Your 401K

For the last several years, I’ve had the opportunity to offer financial education sessions to Members and Cast Members throughout The Walt Disney Company. We focus on a variety of topics, everything from budgeting and understanding credit to discovering what it takes to buy a home and how to start planning for retirement. Of all the topics that we focus on, retirement and,more specifically, 401K retirement savings plans have sparked a lot of interest lately. Perhaps that’s because it’s a topic that we hear about constantly, but one that we don’t necessarily delve into enough. Since it’s never too early to start planning for retirement—or catch up with retirement savings, for that matter—allow us to share a little insight with you on the benefits of a 401K retirement savings plan.

If you currently work with an employer that offers a 401K retirement plan, or you have in the past, you’ve probably been encouraged to set up your 401K account the moment you became eligible. Why you ask? Because a 401K plan is a retirement plan option that usually offers employees an employer match, which is also like getting “free” money—and what better benefit could one ask for than free money! Most employers have their own specific match maximum, but the percentage they contribute, or in this case match, is in addition to the money that you contribute from your paycheck, therefore giving you the opportunity to grow your savings faster.

Another benefit of a 401K plan is that it’s a great way for you to diversify your investment portfolio. Yes, we said it, the infamous “diversification” recommendation! Luckily for you, when it comes to a 401K plan, there are a variety of investment options such as stocks, bonds, mutual funds and more. One thing to keep in mind though, is that most 401K plans are managed by theinvestment company chosen by the employer. Therefore, when you contribute to this type of plan, you can only choose from the investment options available within that specific plan. However, not to worry, you still decide where your money goes and how it’s divided between thevarious options available to you.

One of the other benefits of a 401K plan, which you’re most likely familiar with, is that contributions are made prior to your income being taxed—a win-win for you as it reduces your taxable income. However, what a lot of investors like you and I may not know, is that in addition to traditional 401K plans, most employers also offer Roth 401K plans.

With a Roth 401K you still have the same investment options and you still get the match. However, what sets a Roth 401K apart from a traditional 401K is that contributions are made after your income has been taxed. Now, you might be asking yourself, why would I choose the “after-tax” option? The best answer to that is, it depends (I know, very lawyer-like!), but here is why I say that. If you’re in the position to be in a higher tax bracket at the time you retire, which most of us aim for as we grow in our careers, it’s a good idea to contribute funds that have already been taxed, so that when you withdraw the funds, you are withdrawing them tax-free. We always recommend that you speak with your tax advisor or financial advisor to determine how much to contribute and where your contributions should be allocated to ensure that you arechoosing the options that align with your finances and your overall financial journey.

It pays (pun intended!) to learn about these and the other different retirement account options available to ensure that you are prepared to live a comfortable life in retirement. Join us for one of our financial education sessions to learn more, or visit our site for more information.