THE NEW RULES OF RETIREMENT SAVING • 21
• Your contributions and all the earnings in your 401(k) are then taxed when you withdraw the funds in retirement. So if you take $100 out of your 401(k) in retirement, you may only get a check for $60 once taxes are paid. Remember: you pay not only federal taxes, but state and local taxes as well. • Most 401(k) assets are invested in mutual funds and other funds tied to the stock market. This means 401(k)s tend to do well when the market does well and suffer when the market collapses. Other savers invest their 401(k)s in bonds, or some mixture of the two. Bonds can come with their own sets of risks when interest rates are low like today. • There are also many regulations around 401(k)s. If you access any of the money in your account before age fifty-nine-and- one-half, you’ll have to pay a 10 percent penalty on top of the taxes you owe. • And the government requires you to start withdrawing money at the designated age . Why, you may ask? Because it wants to begin taxing those assets. • There are limits to how much money you can contribute each year. In 20 2 3 , that amount is $ 22 , 5 00 a year for savers under the age of fifty . ² • And finally, like all financial products, there are fees built in to 401(k)s, both from the plan administrator and from the indi- vidual mutual funds within the account. These fees run around 1 or 2 percent, which may not seem like a lot until you do the math. If your account earns 6 percent this year, you could only net 4 percent after fees. Let’s say you’re sixty and have amassed $1 million in your account. Those two percent fees now cost you $20,000 a year.
² IRS. October 21, 2023. 401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500" https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit- rises-to-6500
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