Whether it’s called a 401(k), 403(b), 457(d), or any other variety of employer-sponsored retirement plan, most people are aware of the basics involved in investing for their retirement through a workplan. However, given the sheer size and complexity of our tax code, there are many little-known provisions afforded to employer-sponsored retirement plan participants that make them unique and even more beneficial than previously thought.
Lower Distribution Age
The magical age of 59 1/2 is widely known as the age you need to attain before you can start taking distributions on most retirement accounts without an early withdrawal penalty. However, if you have an employer-sponsored plan like a 401(k) from a former job, you can start taking distributions at 55 without feeling the wrath of the IRS.
This holds true even for those that are still working and currently making contributions into a different plan. Always remember, however, that just because you can take those penalty free distributions doesn’t necessarily mean you should. Thanks to compounding interest and exponential growth, the longer you keep those assets intact, the better they will grow over the longer-term.
Of course, 70 1/2 is yet another ubiquitous number when it comes to most retirement accounts as it almost uniformly represents the age you must start taking required minimum distributions. If you are still working at that age, however, the IRS does not force you to begin your required minimum distributions until you retire, even when that age is greater than 70 1/2. This tax provision is exclusive to employer-sponsored plans and does not apply to a traditional IRA.
Perhaps the most obvious difference between a 401(k) and an IRA is the huge discrepancy in contribution limits. Although the limits between the two different types of retirement plans vary over time, the contribution caps on employer-sponsored plans tend to be at least three times greater than those of an IRA.
Cash flow permitting, this provides employees a tremendous opportunity to devote a significant sum of money every year for their own retirement. Since old-fashioned, cash-based pension plans are nearly extinct, taking advantage of these higher contribution limits is a great way to more effectively reach your financial goals for retirement.
Since all of these 401(k) features are not dependent on your particular employer’s plan but given by the IRS itself, they hold true for all 401(k)s. As always, however, make financial decisions that are appropriate for your own specific goals and demands.
Jeremy Wallace is founder and chief investment officer at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Jeremy has 20 years of experience in the financial industry and is passionate about helping clients preserve and enhance their wealth so they can pursue their passions. Jeremy graduated from Emory University with a degree in international economics and a certificate in financial planning. Outside of the office, Jeremy spends most of his free time with his wife, Julie, and their three children, Isabel, Lincoln, and Reid. He is an avid Chicago Cubs baseball fan, and he enjoys golfing with his wife and traveling with his family. Learn more about Jeremy by connecting with him on LinkedIn.