RETUPD Archives | Page 4 of 21

May

2024

What Is a Guaranteed Minimum Income Benefit (GMIB)?

By Rebecca Lake | Growing Wealth, invest, Investing, Terminology | Comments Off

A guaranteed minimum income benefit (GMIB) is an optional rider that can be included in an annuity contract to provide a minimum income amount to the annuity holder. An annuity is an insurance product in which you pay a premium to the insurance company, then receive payments back at a later date. There are a number of different types of annuities, with different annuity rates.

A GMIB annuity can ensure that you receive a consistent stream of guaranteed income. If you’re considering buying an annuity for your retirement, it’s helpful to understand what guaranteed minimum income means, and how it works.

Key Points

• A Guaranteed Minimum Income Benefit (GMIB) is an optional rider in an annuity contract ensuring a minimum income.

• GMIBs protect annuity payments from market volatility, offering stable income in retirement.

• These benefits are available in variable or indexed annuities, which tie earnings to market performance.

• The cost of GMIBs can be high, as adding riders increases the overall expense of the annuity.

• Evaluating the financial stability of the annuity provider is crucial, as the company’s health impacts the security of the guaranteed income.

GMIBs, Defined

A guaranteed minimum income benefit (GMIB) is a rider that the annuity holder can purchase, at an additional cost, and add it onto their annuity. The goal of a GMIB is to ensure that the annuitant will continue to receive payments from the contract — that’s the “guaranteed minimum income” part — without those payments being affected by market volatility.

Annuities are one option you might consider when starting a retirement fund. But what are annuities and how do they work? It’s important to answer this question first when discussing guaranteed minimum income benefits.

As noted, an annuity is a type of insurance contract. You purchase the contract, typically with a lump sum, on the condition that the annuity company pays money back to you now or starting at a later date, e.g. in retirement.

Depending on how the annuity is structured, your money may be invested in underlying securities or not. Depending on the terms and the annuity rates involved, you may receive a lump sum or regular monthly payments. The amount of the payment is determined by the amount of your initial deposit or premium, and the terms of the annuity contract.

A GMIB annuity is most often a variable annuity or indexed annuity product (though annuities for retirement can come in many different types).

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How GMIBs Work

Let’s look at two different types of annuities for retirement: variable and indexed.

• Variable annuities can offer a range of investment types, often in the form of mutual funds that hold a combination of stocks, bonds, and money market instruments.

• Indexed annuities offer returns that are indexed to an underlying benchmark, such as the S&P 500 index, Nasdaq, or Russell 2000. This is similar to other types of indexed investments.

With either one, the value of the annuity contract is determined by the performance of the underlying investments you choose.

When the market is strong, variable annuities or indexed annuities can deliver higher returns. When market volatility increases, however, that can reduce the value of your annuity. A GMIB annuity builds in some protection against market risk by specifying a guaranteed minimum income payment you’ll receive from the annuity, independent of the annuity’s underlying market-based performance.

Of course, what you can draw from an annuity to begin with will depend on how much you invest in the contract, stated annuity rates, and to some degree your investment performance. But having a GMIB rider on this type of retirement plan can help you to lock in a predetermined amount of future income.

Recommended: Types of Retirement Accounts

Pros & Cons of GMIBs

Guaranteed minimum income benefit annuities can be appealing for investors who want to have a guaranteed income stream in retirement. Whether it makes sense to purchase one can depend on how much you have to invest, how much income you’re hoping to generate, your overall goals and risk tolerance.

Weighing the pros and cons can help you to decide if a GMIB annuity is a good fit for your retirement planning strategy.

Pros of GMIBs

The main benefit of a GMIB annuity is the ability to receive a guaranteed amount of income in retirement. This can make planning for retirement easier as you can estimate how much money you’re guaranteed to receive from the annuity, regardless of what happens in the market between now and the time you choose to retire.

If you’re concerned about your spouse or partner being on track for their own retirement, that income can also carry over to your spouse and help fund their retirement needs, if you should pass away first. You can structure the annuity to make payments to you beginning at a certain date, then continue those payments to your spouse for the remainder of their life. This can provide reassurance that your spouse won’t be left struggling financially after you’re gone.

Cons of GMIBs

A main disadvantage of guaranteed minimum income benefit annuities is the cost. The more riders you add on to an annuity contract, the more this can increase the cost. So that’s something to factor in if you have a limited amount of money to invest in a variable or indexed annuity with a GMIB rider. Annuities may also come with other types of investment fees, so you may want to consult with a professional who can help you decipher the fine print.

It’s also important to consider the quality of the annuity company. An annuity is only as good as the company that issues the contract. If the company were to go out of business, your guaranteed income stream could dry up. For that reason, it’s important to review annuity ratings to get a sense of how financially stable a particular company is.

Examples of GMIB Annuities

Variable or indexed annuities that include a guaranteed minimum income benefit can be structured in different ways. For example, you may be offered the opportunity to purchase a variable annuity for $250,000. The annuity contract includes a GMIB order that guarantees you the greater of:

• The annuity’s actual value

• 6% interest compounded annually

• The highest value reached in the account historically

The annuity has a 10-year accumulation period in which your investments can earn interest and grow in value. This is followed by the draw period, in which you can begin taking money from the annuity.

Now, assume that at the beginning of the draw period the annuity’s actual value is $300,000. But if you were to calculate the annuitized value based on the 6% interest compounded annually, the annuity would be worth closer to $450,000. Since you have this built into the contract, you can opt to receive the higher amount thanks to the guaranteed minimum income benefit.

This example also illustrates why it’s important to be selective when choosing annuity contracts with a guaranteed minimum income benefit. The higher the guaranteed compounding benefit the better, as this can return more interest to you even if the annuity loses value because of shifting market conditions.

It’s also important to consider how long the interest will compound. Again, the more years interest can compound the better, in terms of how that might translate to the size of your guaranteed income payout later.

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The Takeaway

As discussed, guaranteed minimum income benefits (GMIB) are optional riders that can be included in an annuity contract to provide a minimum income amount to the annuity holder. Annuities can help round out your financial strategy if you’re looking for ways to create guaranteed income in retirement.

Annuities may be a part of a larger investment and retirement planning strategy, along with other types of retirement accounts. To get a better sense of how they may fit in, if at all, it may be a good idea to speak with a financial professional.

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FAQ

What are guaranteed benefits?

When discussing annuities for retirement, guaranteed benefits are amounts that you are guaranteed to receive. Depending on how the annuity contract is structured, you may receive guaranteed benefits as a lump sum payment or annuitized payments.

What is the guaranteed minimum withdrawal benefit?

The guaranteed minimum withdrawal benefit is the amount you’re guaranteed to be able to withdraw from an annuity once the accumulation period ends. This can be the annuity’s actual value, an amount that reflects interest compounded annually or the annuity contract’s highest historical value.

What are the two types of guaranteed living benefits?

There are actually more than two types of guaranteed living benefits. For example, your annuity contract might include a guaranteed minimum income benefit, guaranteed minimum accumulation benefit or guaranteed lifetime withdrawal benefit.

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May

2024

Roth 401(k) vs Traditional 401(k): Which Is Best for You?

By AJ Smith | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A traditional 401(k) and a Roth 401(k) are tax-advantaged retirement plans that can help you save for retirement. While both types of accounts follow similar rules — they have the same contribution limits, for example — the impact of a Roth 401(k) vs. traditional 401(k) on your tax situation, now and in the future, may be quite different.

In brief: The contributions you make to a traditional 401(k) are deducted from your gross income, and thus may help lower your tax bill. But you’ll owe taxes on the money you withdraw later for retirement.

Conversely, you contribute after-tax funds to a Roth 401(k) and can typically withdraw the money tax free in retirement — but you don’t get a tax break now.

To help choose between a Roth 401(k) vs. a traditional 401(k) — or whether it might make sense to invest in both, if your employer offers that option — it helps to know what these accounts are all about.

Key Points

• Traditional 401(k) contributions are made with pre-tax dollars, reducing taxable income for the year of contribution.

• Roth 401(k) contributions are made with after-tax dollars, offering tax-free withdrawals in retirement.

• Withdrawals from traditional 401(k)s are taxed as income, whereas Roth 401(k) withdrawals are tax-free if rules are followed.

• Early withdrawals from both accounts may incur taxes and penalties, though Roth contributions can be withdrawn tax-free.

• Starting January 2024, Roth 401(k)s are not subject to required minimum distributions, unlike traditional 401(k)s.

5 Key Differences Between Roth 401(k) vs Traditional 401(k)

Before deciding on a Roth 401(k) or traditional 401(k), it’s important to understand the differences between each account, and to consider the tax benefits of each in light of your own financial plan. The timing of the tax advantages of each type of account is also important to weigh.

1. How Each Account is Funded

• A traditional 401(k) allows individuals to make pre-tax contributions. These contributions are typically made through elective salary deferrals that come directly from an employee’s paycheck and are deducted from their gross income.

• Employees contribute to a Roth 401(k) also generally via elective salary deferrals, but they are using after-tax dollars. So the money the employee contributes to a Roth 401(k) cannot be deducted from their current income.

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2. Tax Treatment of Contributions

• The contributions to a traditional 401(k) are tax-deductible, which means they can reduce your taxable income now, and they grow tax-deferred (but you’ll owe taxes later).

• By contrast, since you’ve already paid taxes on the money you contribute to a Roth 401(k), the money you contribute isn’t deductible from your gross income, and withdrawals are generally tax free (some exceptions below).

3. Withdrawal Rules

• You can begin taking qualified withdrawals from a traditional 401(k) starting at age 59 ½, and the money you withdraw is taxed at ordinary income rates.

• To withdraw contributions + earnings tax free from a Roth 401(k) you must be 59 ½ and have held the account for at least five years (often called the 5-year rule). If you open a Roth 401(k) when you’re 57, you cannot take tax-free withdrawals at 59 ½, as you would with a traditional 401(k). You’d have to wait until five years had passed, and start tax-free withdrawals at age 62.

4. Early Withdrawal Rules

• Early withdrawals from a 401(k) before age 59 ½ are subject to tax and a 10% penalty in most cases, but there are some exceptions where early withdrawals are not penalized, including certain medical expenses; a down payment on a first home; qualified education expenses.

You may also be able to take a hardship withdrawal penalty-free, but you need to meet the criteria, and you would still owe taxes on the money you withdrew.

• Early withdrawals from a Roth 401(k) are more complicated. You can withdraw your contributions at any time, but you’ll owe tax proportional to your earnings, which are taxable when you withdraw before age 59 ½.

For example: If you have $100,000 in a Roth 401(k), including $90,000 in contributions and $10,000 in taxable gains, the gains represent a 10% of the account. Therefore, if you took a $20,000 early withdrawal, you’d owe taxes on 10% to account for the gains, or $2,000.

5. Required Minimum Distribution (RMD) Rules

With a traditional 401(k), individuals must take required minimum distributions starting at age 73, or face potential penalties. While Roth 401(k)s used to have RMDs, as of January 2024, they no longer do. That means you are not required to withdraw RMDs from a Roth 401(k) account.

For a quick side-by-side comparison, here are the key differences of a Roth 401(k) vs. traditional 401(k):

Traditional 401(k)	Roth 401(k)
Funded with pre-tax dollars.	Funded with after-tax dollars.
Contributions are deducted from gross income and may lower your tax bill.	Contributions are not deductible.
All withdrawals taxed as income.	Withdrawals of contributions + earnings are tax free after 59 ½, if you’ve had the account for at least 5 years. (However, matching contributions from an employer made with pre-tax dollars are subject to tax.)
Early withdrawals before age 59 ½ are taxed as income and are typically subject to a 10% penalty, with some exceptions.	Early withdrawals of contributions are not taxed, but earnings may be taxed and subject to a 10% penalty.
Account subject to RMD rules starting at age 73.	No longer subject to RMD rules as of January 2024.

Bear in mind that a traditional 401(k) and Roth 401(k) also share many features in common:

• The annual contribution limits are the same for a 401(k) and a Roth 401(k). For 2024, the total amount you can contribute to these employer-sponsored accounts is $23,000; if you’re 50 and older you can save an additional $7,500 for a total of $30,500. This is an increase over the 2023 limit, which was capped at $22,500 ($30,000 if you’re 50 and older).

• For both accounts, employers may contribute matching funds up to a certain percentage of an employee’s salary.

• In 2024, total contributions from employer and employee cannot exceed $69,000 ($76,500 for those 50 and up). In 2023, total contributions from employer and employee cannot exceed $66,000 ($73,500 for those 50 and up).

• Employees may take out a loan from either type of account, subject to IRS restrictions and plan rules.

Because there are certain overlaps between the two accounts, as well as many points of contrast, it’s wise to consult with a professional when making a tax-related plan.

How to Choose Between a Roth and a Traditional 401(k)

In some cases it might make sense to contribute to both types of accounts (more on that below), but in other cases you may want to choose either a traditional 401(k) or a Roth 401(k) to maximize the specific advantages of one account over another. Here are some considerations.

When to Pay Taxes

Traditional 401(k) withdrawals are taxed at an individual’s ordinary income tax rate, typically in retirement. As a result these plans can be most tax efficient for those who will have a lower marginal rate after they retire than they did while they were working.

In other words, a traditional 401(k) may help you save on taxes now, if you’re in a higher tax bracket — and then pay lower taxes in retirement, when you’re ideally in a lower tax bracket.

On the other hand, an investor might look into the Roth 401(k) option if they feel that they pay lower taxes now than they will in retirement. In that case, you’d potentially pay lower taxes on your contributions now, and none on your withdrawals in retirement.

Your Age

Often, younger taxpayers may be in a lower tax bracket. If that’s the case, contributing to a Roth 401(k) may make more sense for the same reason above: because you’ll pay a lower rate on your contributions now, but then they’re completely tax free in retirement.

If you’re older, perhaps mid-career, and in a higher tax bracket, a traditional 401(k) might help lower your tax burden now (and if your tax rate is lower when you retire, even better, as you’d pay taxes on withdrawals but at a lower rate).

Where You Live

The tax rates where you live, or where you plan to live when you retire, are also a big factor to consider. Of course your location some years from now, or decades from now, can be difficult to predict (to say the least). But if you expect that you might be living in an area with lower taxes than you are now, e.g. a state with no state taxes, it might make sense to contribute to a traditional 401(k) and take the tax break now, since your withdrawals may be taxed at a lower rate.

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The Benefits of Investing in Both a Roth 401(k) and Traditional 401(k)

If an employer offers both a traditional and Roth 401(k) options, employees might have the option of contributing to both, thus taking advantage of the pros of each type of account. In many respects, this could be a wise choice.

Divvying up contributions between both types of accounts allows for greater flexibility in tax planning down the road. Upon retirement, an individual can choose whether to withdraw money from their tax-free 401(k) account or the traditional, taxable 401(k) account each year, to help manage their taxable income.

It is important to note that the $23,000 contribution limit ($30,500 for those 50 and older) for 2024 is a total limit on both accounts.

So, for instance, you might choose to save $13,500 in a traditional 401(k) and $9,500 in a Roth 401(k) for the year. You are not permitted to save $23,000 in each account.

What’s the Best Split Between Roth and Traditional 401(k)?

The best split between a Roth 401(k) and a traditional 401(k) depends on your individual financial situation and what might work best for you from a tax perspective. You may want to do an even split of the $23,000 limit you can contribute in 2024. Or, if you’re in a higher tax bracket now than you expect to be in retirement, you might decide that it makes more sense for you to put more into your traditional 401(k) to help lower your taxable income now. But if you expect to be in a higher income tax bracket in retirement, you may want to put more into your Roth 401(k).

Consider all the possibilities and implications before you decide. You may also want to consult a tax professional.

The Takeaway

Employer-sponsored Roth and traditional 401(k) plans offer investors many options when it comes to their financial goals. Because a traditional 401(k) can help lower your tax bill now, and a Roth 401(k) generally offers a tax-free income stream later — it’s important for investors to consider the tax advantages of both, the timing of those tax benefits, and whether these accounts have to be mutually exclusive or if it might benefit you to have both.

When it comes to retirement plans, investors don’t necessarily have to decide between a Roth or traditional 401(k). Some might choose one of these investment accounts, while others might find a combination of plans suits their goals. After all, it can be difficult to predict your financial circumstances with complete accuracy — especially when it comes to tax planning — so you may decide to hedge your bets and contribute to both types of accounts, if your employer offers that option.

Another step to consider is a 401(k) rollover, where you move funds from an old 401(k) into an IRA. When you do a 401(k) rollover it can help you manage your retirement funds.

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FAQ

Is it better to contribute to 401(k) or Roth 401(k)?

Whether it’s better to contribute to a traditional 401(k) or Roth 401(k) depends on your particular financial situation. In general, if you expect to be in a lower tax bracket in retirement, a traditional 401(k) may make more sense for you since you’ll be able to deduct your contributions when you make them, which can lower your taxable income, and then pay taxes on the money in retirement, when you’re in a lower income tax bracket.

But if you’re in a lower tax bracket now than you think you will be later, a Roth 401(k) might be the preferred option for you because you’ll generally withdraw the money tax-free in retirement.

Can I max out both 401(k) and Roth 401(k)?

No, you cannot max out both accounts. Per IRS rules, the annual 401(k) limits apply across all your 401(k) accounts combined. So for 2024, you can contribute a combined amount up to $23,000 (or $30,500 if you’re 50 or older) to your Roth 401(k) and your traditional 401(k) accounts.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

May

2024

Should I Put My Bonus Into My 401(k)? Here’s What You Should Consider

By Paulina Likos | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

If you received a bonus and you’re wondering what to do with the bonus money, you’re not alone. Investing your bonus money in a tax-advantaged retirement account like a 401(k) has some tangible advantages. Not only will the extra cash help your nest egg to grow, you could also see some potential tax benefits.

Of course, we live in a world of competing financial priorities. You could also pay down debt, spend the money on something you need, save for a near-term goal — or splurge! The array of choices can be exciting — but if a secure future is your top goal, it’s important to consider a 401(k) bonus deferral.

Here are a few strategies to think about before you make a move.

Key Points

• Investing a bonus in a 401(k) can significantly enhance retirement savings and offer potential tax benefits.

• Bonuses are subject to income tax withholding, which may reduce the expected amount.

• The 2024 contribution limit for a 401(k) is $23,000, with an additional $7,500 allowed for those 50 and older.

• If 401(k) contributions are maxed out, considering an IRA or a taxable brokerage account is beneficial.

• Allocating a bonus to a 401(k) or IRA can reduce taxable income for the year, potentially lowering the tax bill.

Receiving a Bonus Check

First, a practical reminder. When you get a bonus check, it may not be in the amount that you expected. This is because bonuses are subject to income tax withholding. Knowing how your bonus is taxed can help you understand how much you’ll end up with so you can determine what to do with the money that’s left, such as making a 401(k) bonus contribution. The IRS considers bonuses as supplemental wages rather than regular wages.

Ultimately, your employer decides how to treat tax withholding from your bonus. Employers may withhold 22% of your bonus to go toward federal income taxes. But some employers may add your whole bonus to your regular paycheck, and then tax the larger amount at normal income tax rates. If your bonus puts you in a higher tax bracket for that pay period, you may pay more than you expected in taxes.

Also, your bonus may come lumped in with your paycheck (not as a separate payout), which can be confusing.

Whatever the final amount is, or how it arrives, be sure to set aside the full amount while you weigh your options — otherwise you might be tempted to spend it.

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What to Do With Bonus Money

There’s nothing wrong with spending some of your hard-earned bonus from your compensation. One rule of thumb is to set a percentage of every windfall (e.g. 10% or 20%) — whether a bonus or a birthday check — to spend, and save the rest.

To get the most out of a bonus, though, many people opt for a 401k bonus deferral and put some or all of it into their 401(k) account. The amount of your bonus you decide to put in depends on how much you’ve already contributed, and whether it makes sense from a tax perspective to make a 401(k) bonus contribution.

Contributing to a 401(k)

The contribution limit for 401(k) plans in 2024 is $23,000; for those 50 and older you can add another $7,500, for a total of $30,500. The contribution limit for 401(k) plans in 2023 is $22,500; for those 50 and older you can add another $7,500, for a total of $30,000. If you haven’t reached the limit yet, allocating some of your bonus into your retirement plan can be a great way to boost your retirement savings.

In the case where you’ve already maxed out your 401(k) contributions, your bonus can also allow you to invest in an IRA or a non-retirement (i.e. taxable) brokerage account.

Contributing to an IRA

If you’ve maxed out your 401k contributions for the year, you may still be able to open a traditional tax-deferred IRA or a Roth IRA. It depends on your income.

In 2024, the contribution limit for traditional IRAs and Roth IRAs is $7,000; with an additional $1,000 if you’re 50 or older. In 2023, the contribution limit for traditional IRAs and Roth IRAs is $6,500; with an additional $1,000 if you’re 50 or older. But if your income is over $161,000 (for single filers) or over $240,000 (for married filing jointly) in 2024, you aren’t eligible to contribute to a Roth. For 2023, you can’t contribute to a Roth if your income is over $153,000 (for single filers) or over $228,000 (for married filing jointly). And while a traditional IRA doesn’t have income limits, the picture changes if you’re covered by a workplace plan like a 401(k).

If you’re covered by a workplace retirement plan and your income is too high for a Roth, you likely wouldn’t be eligible to open a traditional, tax-deductible IRA either. You could however open a nondeductible IRA. To understand the difference, you may want to consult with a professional.

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Contributing to a Taxable Account

Of course, when you’re weighing what to do with bonus money, you don’t want to leave out this important option: Opening a taxable account.

While employer-sponsored retirement accounts typically have some restrictions on what you can invest in, taxable brokerage accounts allow you to invest in a wider range of investments.

So if your 401(k) is maxed out, and an IRA isn’t an option for you, you can use your bonus to invest in stocks, bonds, exchange-traded funds (ETFs), mutual funds, and more in a taxable account.

Deferred Compensation

You also may be able to save some of your bonus from taxes by deferring compensation. This is when an employee’s compensation is withheld for distribution at a later date in order to provide future tax benefits.

In this scenario, you could set aside some of your compensation or bonus to be paid in the future. When you defer income, you still need to pay taxes later, at the time you receive your deferred income.

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Your Bonus and 401(k) Tax Breaks

Wondering what to do with a bonus? It’s a smart question to ask. In order to maximize the value of your bonus, you want to make sure you reduce your taxes where you can.

One method that’s frequently used to reduce income taxes on a bonus is adding some of it into a tax-deferred retirement account like a 401(k) or traditional IRA. The amount of money you put into these accounts typically reduces your taxable income in the year that you deposit it.

Here’s how it works. The amount you contribute to a 401(k) or traditional IRA is tax deductible, meaning you can deduct the amount you save from your taxable income, often lowering your tax bill. (The same is not true for a Roth IRA or a Roth 401(k), where you make contributions on an after-tax basis.)

The annual contribution limits for each of these retirement accounts noted above may vary from year to year. Depending on the size of your bonus and how much you’ve already contributed to your retirement account for a particular year, you may be able to either put some or all of your bonus in a tax-deferred retirement account.

It’s important to keep track of how much you have already contributed to your retirement accounts because you don’t want to put in too much of your bonus and exceed the contribution limit. In the case where you have reached the contribution limit, you can put some of your bonus into other tax deferred accounts including a traditional IRA or a Roth IRA.

How Investing Your Bonus Can Help Over Time

Investing your bonus may help increase its value over the long-run. As your money potentially grows in value over time, it can be used in many ways: You can stow part of it away for retirement, as an emergency fund, a down payment for a home, to pay outstanding debts, or another financial goal.

While it can be helpful to have some of your bonus in cash, your money is typically better in a savings or investment account where it has the potential to work for you. If you start investing your bonus each year in either a tax-deferred retirement account or non-retirement account, this could help you save for the future.

Investing for Retirement With SoFi

The yearly question of what to do with a bonus is a common one. Just having that windfall allows for many financial opportunities, such as saving for immediate needs — or purchasing things you need now. But it may be wisest to use your bonus to boost your retirement nest egg — for the simple reason that you may stand to gain more financially down the road, while also potentially enjoying tax benefits in the present.

The fact is, most people don’t max out their 401(k) contributions each year, so if you’re in that boat it might make sense to take some or all of your bonus and max it out. If you have maxed out your 401(k), you still have options to save for the future via traditional or Roth IRAs, deferred compensation, or investing in a taxable account.

Keeping in mind the tax implications of where you invest can also help you allocate this extra money where it fits best with your plan.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

Is it good to put your bonus into a 401(k)?

The short answer is yes. It might be wise to put some or all of your bonus in your 401(k), depending on how much you’ve contributed to your workplace account already. You want to make sure you don’t exceed the 401(k) contribution limit.

How can I avoid paying tax on my bonus?

Your bonus will be taxed, but you can lower the amount of your taxable income by depositing some or all of it in a tax-deferred retirement account such as a 401(k) or IRA. However, this does not mean you will avoid paying taxes completely. Once you withdraw the money from these accounts in retirement, it will be subject to ordinary income tax.

Can I put all of my bonus into a 401(k)?

Possibly. You can put all of your bonus in your 401(k) if you haven’t reached the contribution limit for that particular year, and if you won’t surpass it by adding all of your bonus. For 2023, the contribution limit for a 401(k) is $22,500 if you’re younger than 50 years old; those 50 and over can contribute an additional $7,500 for a total of $30,000. In 2024, the contribution limit for a 401(k) is $23,000 if you’re under age 50, and those 50 and up can contribute an additional $7,500 for a total of $30,500.

You may also be interested in:

How Much Should I Contribute to My 401k?

Guide to Maxing Out Your 401(k)

The Average 401(k) Balance by Age

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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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SOIN0124066

May

2024

Finding Your Old 401k: Here's What to Do

How to Find an Old 401(k)

By Rebecca Lake | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

Tracking down an old 401(k) may take some time, and perhaps the quickest way to find old 401(k) money is to contact your former employer to see where the account is now. It’s possible that your lost 401(k) isn’t lost at all; instead, it’s right where you left it.

In some cases, however, employers may cash out an old 401(k) or roll it over to an IRA on behalf of a former employee. In that case, you might have to do a little more digging to find lost 401(k) funds. If you ever wished you could click on an app called “Find my 401(k),” the following strategies may be of use.

Key Points

• Contacting previous employers is a primary method for locating old 401(k) accounts.

• Old account statements can be useful for directly reaching out to 401(k) providers.

• Government agencies keep records that can help track down old 401(k) plans.

• National registries may list unclaimed retirement benefits, searchable by Social Security number.

• Recovered 401(k) funds can be rolled over into another retirement account or cashed out.

4 Ways to Track Down Lost or Forgotten 401(k) Accounts

There’s no real secret to how to find old 401(k) accounts. But the process can be a little time consuming as it may require you to search online or make a phone call or two. But it can be well worth it if you’re able to locate your old 401(k).

There are several ways to find an old 401(k) account. Here are a handful that may prove fruitful.

1. Contact Former Employers

The first place to start when trying to find old 401(k) accounts is with your previous employer.

If you had more than $5,000 in your 401(k) at the time you left your job, it’s likely that your account may still be right where you left it. In that case, you have a few options for what to do with the money:

• Leave it where it is

• Transfer your 401(k) to your current employer’s qualified plan

• Rollover the account into an Individual Retirement Account (IRA)

• Cash it out

When your plan balance is less than $5,000 your employer might require you to do a 401(k) rollover or cash it out. If you’re comfortable with the investment options offered through the plan and the fees you’ll pay, you might decide to leave it alone until you get a little closer to retirement. On the other hand, if you’d like to consolidate all of your retirement money into a single account, you may want to roll it into your current plan or into an IRA.

Cashing out your 401(k) has some downsides. You would owe taxes on the money, and likely an early withdrawal penalty as well. So you may only want to consider this option if your account holds a smaller amount of money. If you had less than $5,000 in your old 401(k), it’s possible that your employer may have rolled the money over to an IRA for you or cashed it out and mailed a check to you.

Recommended: How Does a 401(k) Rollover Work?

2. Track Down Old Statements

If you have an old account statement, you can contact your 401(k) provider directly to find out what’s happened to your lost 401(k). This might be necessary if your former employer has gone out of business and your old 401(k) plan was terminated.

When a company terminates a 401(k), the IRS requires a rollover notice to be sent to plan participants. If you’ve moved since leaving the company, the plan administrator may have outdated address information for you on file. So you may not be aware that the money was rolled over.

Either way, your plan administrator should be able to tell you which custodian now holds your lost 401(k) funds. Once you have that information, you could reach out to the custodian to determine how much money is in the account. You can then decide if you want to leave it where it is, roll it over to another retirement account, or cash it out.

3. Check With Government Agencies

Different types of retirement plans, including 401(k) plans, are required to keep certain information on file with the IRS and the Department of Labor (DOL). One key piece of information is DOL Form 5500. This form is used to collect data for employee benefit plans that are subject to federal ERISA (Employee Retirement Income Security Act) guidelines.

How does that help you find your 401(k)? The Department of Labor offers a Form 5500 search tool online that you can use to locate lost 401(k) plans. You can search by plan name or plan sponsor. If you know either one, you can look up the plan’s Form 5500, which should include contact information. From there, you can reach out to the plan sponsor to track down your lost 401(k).

4. Search National Registries

Another place to try is the National Registry of Unclaimed Retirement Benefits. This is an online database you can use to search for an unclaimed 401(k) that you may have left with a previous employer. You’ll need to enter your Social Security number to search for lost retirement account benefits.

In order for your name to come up in the search results, your former employer must have entered your name and personal information in that database. If they haven’t done so, it’s possible you may not find your account this way.

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

What Should I Do With Recovered Funds?

If you do manage to recover an old 401(k) account and its assets, you’ll have some options as to what to do with it. In many cases, it might be a good idea to roll it over into another retirement account to try and stay on track with your retirement savings.

Another important point to consider: If you’ve changed jobs multiple times, it’s possible that you could have more than one “lost” 401(k) — and taken together, that money could make a surprising difference to your nest egg.

Last, if you were lucky to have an employer that offered a matching 401(k) contribution, your missing account (or accounts) may have more money in them than you think. For example, a common employer match is 50%, up to the first 6% of your salary. If you don’t make an effort to find old 401(k) accounts, you’re missing out on that “free money” as well.

But if you’re unsure of what to do, it may be worth speaking with a financial professional for guidance.

Further, if you’re not able to find lost 401(k) accounts you still have plenty of options for retirement savings. Contributing to your current employer’s 401(k) allows you to set aside money on a tax-deferred basis. And you might be able to grow your money faster with an employer matching contribution.

What if you’re self-employed? In that case, you could choose to open a solo or individual 401(k). This type of 401(k) plan is designed for business owners who have no employees or only employ their spouses. These plans follow the same contribution and withdrawal rules as traditional employer-sponsored 401(k) plans, though special contribution rules apply if you’re self-employed.

💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

The Takeaway

There are several ways to try and find an old 401(k) account, but for most people, the best place to start is by contacting your old employers to see if they can help you. From there, you can also try reaching out to government agencies, tracking down old statements, or even searching through databases to see what you can find.

Saving for retirement is important for most people who are trying to reach their financial goals – as such, if you have money or assets in a retirement account, it may be worthwhile to try and track it down. Again, it may be worth consulting with a financial professional if you need help.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

Is it possible to lose your 401(k)?

It’s possible to lose money from your 401(k) if you’re cashing it out and taking a big tax hit or your investments suffer losses. But simply changing jobs doesn’t mean your old 401(k) is gone for good. It does, however, mean that you may need to spend time locating it if it’s been a while since you changed jobs.

Do I need my social security number to find an old 401(k)?

Generally, yes, you’ll need your Social Security number to find a lost 401(k) account. This is because your Social Security number is used to verify your identity and ensure that the plan you’re inquiring about actually belongs to you.

What happens to an unclaimed 401(k)?

Unclaimed 401(k) accounts may be liquidated or converted to cash if enough time passes, and that cash could be transferred to a state government, where it will be held as unclaimed property.

Can a financial advisor find old 401(k) accounts?

A financial advisor may be able to help, but the simplest way to find old 401(k) accounts is contacting your former employer. It’s possible your money may still be in your old plan and if not, your previous employer or plan administrator may be able to tell you where it’s been moved to.

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

May

2024

How Much Should I Contribute to My 401(k)?

By AJ Smith | Growing Wealth, Investing, Life & Career, Preparing for Retirement | No Comments

Once you set up your retirement plan at work, the next natural question is: How much to contribute to a 401(k)? While there’s no ironclad answer for how much to save in your employer-sponsored plan, there are some important guidelines that can help you set aside the amount that’s right for you, such as the tax implications, your employer match (if there is one), the stage of your career, your own retirement goals, and more.

Here’s what you need to think about when deciding how much to contribute to your 401(k).

Key Points

• Determining the right 401(k) contribution involves considering tax implications, employer matches, career stage, and personal retirement goals.

• The 2024 contribution limit for a 401(k) is $23,000, with a $7,500 catch-up for those 50+.

• Early career contributions might be lower, but capturing any employer match is beneficial.

• Mid-career individuals should aim to increase their contributions annually, even by small percentages.

• Approaching retirement, maximizing contributions and utilizing catch-up provisions can significantly impact savings.

401(k) Contribution Limits for 2024

Like most tax-advantaged retirement plans, 401(k) plans come with caps on how much you can contribute. The IRS puts restrictions on the amount that you, the employee, can save in your 401(k); plus there is a cap on total employee-plus-employer contributions.

For tax year 2024, the contribution limit is $23,000, with an additional $7,500 catch-up provision for those 50 and older, for a total of $30,500. The combined employer-plus-employee contribution limit for 2024 is $69,000 ($76,500 with the catch-up amount).

Those limits are up from tax year 2023. The 401(k) contribution limit in 2023 is $22,500, with an additional $7,500 catch-up provision for those 50 and older, for a total of $30,000. The combined employer-plus-employee contribution limit for 2023 is $66,000 ($73,500 with the catch-up amount).

401(k) Contribution Limits 2024 vs 2023

	2024	2023
Basic contribution	$23,000	$22,500
Catch-up contribution	$7,500	$7,500
Total + catch-up	$30,500	$30,000
Employer + Employee maximum contribution	$69,000	$66,000
Employer + employee max + catch-up	$76,500	$73,500

💡 Quick Tip: How much does it cost to set up an IRA account? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

How Much Should You Put Toward a 401(k)?

Next you may be thinking, now I know the retirement contribution limits, but how much should I contribute to my 401(k)? Here are some guidelines to keep in mind as you’re deciding on your contribution amount.

When You’re Starting Out in Your Career

At this stage, you may be starting out with a lower salary and you also likely have commitments to pay for, like rent, food, and maybe student loans. So you may decide to contribute a smaller amount to your 401(k). If you can, however, contribute enough to get the employer match, if your employer offers one.

Here’s how it works: Some employers offer a matching contribution, where they “match” part of the amount you’re saving and add that to your 401(k) account. A common employer match might be 50% up to the first 6% you save.

In that scenario, let’s say your salary is $100,000 and your employer matches 50% of the first 6% you contribute to your 401(k). If you contribute up to the matching amount, you get the full employer contribution. It’s essentially “free” money, as they say.

To give an example, if you contribute 6% of your $100,000 salary to your 401(k), that’s $6,000 per year. Your employer’s match of 50% of that first 6%, or $6,000, comes to $3,000 for a total of $9,000.

As You Move Up in Your Career

At this stage of life you likely have a lot of financial obligations such as a mortgage, car payments, and possibly child care. It may be tough to also save for retirement, but it’s important not to fall behind. Try to contribute a little more to your 401(k) each year if you can — even 1% more annually can make a difference.

That means if you’re contributing 6% this year, next year contribute 7%. And the year after that bump up your contribution to 8%, and so on until you reach the maximum amount you can contribute. Some 401(k) plans have an auto escalation option that will automate the extra savings for you, to make the process even easier and more seamless. Check your plan to see if it has such a feature.

As You Get Closer to Retirement

Once you reach age 50, you’ll likely want to figure out how much you might need for retirement so you have a specific goal to aim for. To help reach your goal, consider maxing out your 401(k) at this time and also make catch-up contributions if necessary.

Maxing out your 401(k) means contributing the full amount allowed. For 2024, that’s $23,000 for those 49 and under. If, at 50, you haven’t been contributing as much as you wish you had in previous years, you can also contribute the catch-up contribution of $7,500. So you’d be saving $30,500 for retirement in your 401(k) in 2024. With the potential of compounding returns, maxing out your 401(k) until you reach full retirement age of 67 could go a long way to helping you achieve financial security in retirement.

The Impact of Contributing More Over Time

The earlier you start saving for retirement, the more time your money will potentially have to grow, thanks to the power of compounding returns, as mentioned above.

In addition, by increasing your 401(k) contributions each year, even by just 1% annually, the savings could really add up. For instance, consider a 35-year-old making $60,000 who contributes 1% more each year until their full retirement age of 67. Assuming a 5.5% annual return and a modest regular increase in salary, they could potentially save more than an additional $85,000 for retirement.

That’s just an example, but you get the idea. Increasing your savings even by a modest amount over the years may be a powerful tool in helping you realize your retirement goals.

Factors That May Impact Your Decision

In addition to the general ideas above for the different stages of your life and career, it’s also wise to think about taxes, your employer contribution, your own goals, and more when deciding how much to contribute to your 401(k).

1. The Tax Effect

The key fact to remember about 401(k) plans is that they are tax-deferred accounts, and they are considered qualified retirement plans under ERISA (Employment Retirement Income Security Act) rules.

That means: The money you set aside is typically deducted from your paycheck pre-tax, and it grows in the account tax free — but you pay taxes on any money you withdraw. (In most cases, you’ll withdraw the money for retirement expenses, but there are some cases where you might have to take an early 401(k) withdrawal. In either case, you’ll owe taxes on those distributions.)

The tax implications are important here because the money you contribute effectively reduces your taxable income for that year, and potentially lowers your tax bill.

Let’s imagine that you’re earning $100,000 per year, and you’re able to save the full $23,000 allowed by the IRS for 2024. Your taxable income would be reduced from $100,000 to $77,000, thus putting you in a lower tax bracket.

2. Your Earning Situation

One rule-of-thumb is to save at least 10% of your annual income for retirement. So if you earn $100,000, you’d aim to set aside at least $10,000. But 10% is only a general guideline. In some cases, depending on your income and other factors, 10% may not be enough to get you on track for a secure retirement, and you may want to aim for more than that to make sure your savings will last given the cost of living longer.

For instance, consider the following:

• Are you the sole or primary household earner?

• Are you saving for your retirement alone, or for your spouse’s/partner’s retirement as well?

• When do you and your spouse/partner want to retire?

If you are the primary earner, and the amount you’re saving is meant to cover retirement for two, that’s a different equation than if you were covering just your own retirement. In this case, you might want to save more than 10%.

However, if you’re not the primary earner and/or your spouse also has a retirement account, setting aside 10% might be adequate. For example, if the two of you are each saving 10%, for a combined 20% of your gross income, that may be sufficient for your retirement needs.

All of this should be considered in light of when you hope to retire, as that deadline would also impact how much you might save as well as how much you might need to spend.

3. Your Retirement Goals

What sort of retirement do you envision for yourself? Even if you’re years away from retirement, it’s a good idea to sit down and imagine what your later years might look like. These retirement dreams and goals can inform the amount you want to save.

Goals may include thoughts of travel, moving to another country, starting your own small business, offering financial help to your family, leaving a legacy, and more.

You may also want to consider health factors, as health costs and the need for long-term care can be a big expense as you age.

4. Do You Have Debt?

It can be hard to prioritize saving if you have debt. You may want to pay off your debt as quickly as possible, then turn your attention toward saving for the future.

The reality is, though, that debt and savings are both priorities and need to be balanced. It’s not ideal to put one above the other, but rather to find ways to keep saving even small amounts as you work to get out of debt.

Then, as you pay down the money you owe — whether from credit cards or student loans or another source — you can take the cash that frees up and add that to your savings.

The Takeaway

Many people wonder how much to contribute to a 401(k). There are a number of factors that will influence your decision. First, there are the contribution limits imposed by the IRS. In 2024, the maximum contribution you can make to your 401(k) is $23,000, plus an additional $7,500 catch-up contribution if you’re 50 and up.

While few people can start their 401(k) journey by saving quite that much, it’s wise, if possible, to contribute enough to get your employer’s match early in your career, then bump up your contribution amounts at the midpoint of your career, and max out your contributions as you draw closer to retirement, if you can.

Another option is follow a common guideline and save 10% of your income beginning as soon as you can swing it. From there, you can work up to saving the max. And remember, you don’t have to limit your savings to your 401(k). You may also be able to save in other retirement vehicles, like a traditional IRA or Roth IRA.

Of course, a main determination of the amount you need to save is what your goals are for the future. By contemplating what you want and need to spend money on now, and the quality of life you’d like when you’re older, you can make the decisions that are best for you.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

How much should I contribute to my 401(k) per paycheck?

If you can, try to contribute at least enough of each paycheck to get your employer’s matching funds, if they offer a match. So if your employer matches 6% of your contributions, aim to contribute at least 6% of each paycheck.

What percent should I put in my 401(k)?

A common rule of thumb is to contribute at least 10% of your income to your 401(k) to help reach your retirement goals. Just keep in mind the annual 401(k) contribution limits so you don’t exceed them. For 2024, those limits are $23,000, plus an additional $7,500 for those 50 and up

Is 10% too much to contribute to 401(k)? What about 20%?

Contributing at least 10% to your 401(k) is a common rule of thumb to help save for retirement. If you are able to contribute 20%, it can make sense to do so. Just be sure not to exceed the annual 401(k) contribution limits of $23,000, plus an additional $7,500 for those 50 and older for 2024. The contribution limits may change each year, so be sure to check annually.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

GMIBs, Defined

How GMIBs Work

Pros & Cons of GMIBs

Pros of GMIBs

Cons of GMIBs

Examples of GMIB Annuities

The Takeaway

FAQ

What are guaranteed benefits?

What is the guaranteed minimum withdrawal benefit?

What are the two types of guaranteed living benefits?

5 Key Differences Between Roth 401(k) vs Traditional 401(k)

1. How Each Account is Funded

2. Tax Treatment of Contributions

3. Withdrawal Rules

4. Early Withdrawal Rules

5. Required Minimum Distribution (RMD) Rules

How to Choose Between a Roth and a Traditional 401(k)

When to Pay Taxes

Your Age

Where You Live

The Benefits of Investing in Both a Roth 401(k) and Traditional 401(k)

What’s the Best Split Between Roth and Traditional 401(k)?

The Takeaway

FAQ

Is it better to contribute to 401(k) or Roth 401(k)?

Can I max out both 401(k) and Roth 401(k)?

Receiving a Bonus Check

What to Do With Bonus Money

Contributing to a 401(k)

Contributing to an IRA

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

Contributing to a Taxable Account

Deferred Compensation

Your Bonus and 401(k) Tax Breaks

How Investing Your Bonus Can Help Over Time

Investing for Retirement With SoFi

FAQ

Is it good to put your bonus into a 401(k)?

How can I avoid paying tax on my bonus?

Can I put all of my bonus into a 401(k)?

You may also be interested in:

4 Ways to Track Down Lost or Forgotten 401(k) Accounts

1. Contact Former Employers

2. Track Down Old Statements

3. Check With Government Agencies

4. Search National Registries

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

What Should I Do With Recovered Funds?

The Takeaway

FAQ

Is it possible to lose your 401(k)?

Do I need my social security number to find an old 401(k)?

What happens to an unclaimed 401(k)?

Can a financial advisor find old 401(k) accounts?

401(k) Contribution Limits for 2024

401(k) Contribution Limits 2024 vs 2023

How Much Should You Put Toward a 401(k)?

When You’re Starting Out in Your Career

As You Move Up in Your Career

As You Get Closer to Retirement

The Impact of Contributing More Over Time

Factors That May Impact Your Decision

1. The Tax Effect

2. Your Earning Situation

3. Your Retirement Goals

4. Do You Have Debt?

The Takeaway

FAQ

How much should I contribute to my 401(k) per paycheck?

What percent should I put in my 401(k)?

Is 10% too much to contribute to 401(k)? What about 20%?

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Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.¹

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