401(k) Retirement Planning Essentials

401(k) Retirement Planning Essentials

401(k) retirement planning is essential for most Americans who want to retire with a comfortable and sustainable lifestyle.

By Will Grant, CFP® CPWA® of 360 Financial

As a CERTIFIED FINANCIAL PLANNER™ and Certified Private Wealth Advisor®, Will helps clients create their ideal life through values-based financial planning. His process is designed to pursue each client’s objective, whether it’s preparing for retirement, ensuring smooth business succession, funding for education, implementing wealth transfer strategies, or navigating other impactful financial events.

Retirement Planning and Your 401(k) Plan

Retirement planning is an essential step to ensure financial security later in life. The 401(k) plan is one of the most popular tools used by Americans for retirement. 

By setting aside a portion of their income, employees can build a nest egg and start building wealth and preparing for retirement. Additionally, many employers offer matching contributions, further boosting the potential savings. Understanding the ins and outs of a 401(k) is vital for maximizing its benefits.

Let’s go over the benefits of using your 401(k) as part of your retirement plan. 

Table of Contents

  1. What is a 401(k) Plan?
  2. How does a 401(k) retirement plan work?
  3. Traditional 401(k)
  4. Roth 401(k)
  5. How to Contribute to Your 401(k) Plan for Retirement
  6. Pros of a 401(k) for Retirement Planning
  7. Cons of a 401(k) for Retirement Planning
  8. Contribution Limits of a 401(k) Plan
  9. 401(k) vs IRA for Retirement Planning 
  10. 401(k) Updates for 2023
  11. Required Minimum Distributions i.e. What You Have to Withdraw at Retirement
  12. What to Do with Your 401(k) When You Switch Employers
  13. Common Questions about Retirement Planning and 401(k) Plans
  14. Work with a Financial Advisor Online or In Person

What is a 401(k) Plan?

A 401(k) is a retirement savings plan sponsored by employers for their employees. It allows you to save a portion of your paycheck before taxes are taken out. These funds are then invested in a variety of options, including stocks, bonds, and mutual funds. 

Over time, these investments can grow tax-deferred until withdrawals are made in retirement. The name “401(k)” comes from the section of the U.S. tax code that outlines its provisions.

How does a 401(k) retirement plan work?

As an employee, you decide how much of your paycheck you want to contribute to your 401(k) plan. This money is then deducted from your wages or salary before taxes, reducing your taxable income. 

Employers can also contribute to the plan, often through matching your contributions up to a certain percentage. Investments in the 401(k) grow tax-free until they are withdrawn. Once you reaches retirement age, you can start withdrawing from your 401(k), at which point the distributions (i.e. withdrawals) are typically taxed.

How does a 401(k) retirement plan work?

Traditional 401(k)

In a traditional 401(k), contributions are made pre-tax, which means taxes are deferred until funds are withdrawn. This allows employees to reduce their current taxable income, potentially placing them in a lower tax bracket. 

The investments grow tax-deferred, compounding over time. Withdrawals made in retirement are taxed as ordinary income.* 

Penalties usually apply if funds are withdrawn before age 59½, with certain exceptions.

*Ordinary income refers to the regular income an individual receives that is subject to standard tax rates, as opposed to preferential tax rates. It encompasses income generated from typical sources like wages, salaries, commissions, and rental income, among others. 

Roth 401(k)

The Roth 401(k) option allows participants to contribute post-tax dollars. Unlike the traditional 401(k), withdrawals in retirement are generally tax-free, assuming certain conditions are met. This can be a beneficial choice for those who anticipate being in a higher tax bracket during retirement. 

Contributions to a Roth 401(k) don’t reduce your taxable income for the year. However, the trade-off is the potential for tax-free withdrawals later on.

Determining which 401(k) plan makes sense is an important decision that will depend on your specific situation. Click here to schedule a time consult with one of our 360 Financial Wealth Managers. 

Roth 401(k)

How to Contribute to Your 401(k) Plan for Retirement

To start contributing, employees typically select a percentage or fixed amount of their paycheck to allocate towards their 401(k). It’s crucial to review and potentially increase contributions annually to account for salary increases or changing retirement goals. 

Taking advantage of employer match programs is essential, as it’s basically “free money” for retirement. Regularly reviewing the investment options within the plan can help ensure alignment with your financial goals.


It’s important to continuously review your 401(k) contributions and increase when appropriate. The difference can be significant. For instance, if a 25-year-old with a $100,000 income contributes 3% of their salary to their 401(k) annually and receives a 3% employer match, they would be saving $6,000 per year.

Assuming an average annual return of 7% on their investments, by the time they reach 65, their 401(k) balance would be approximately $1.2 million.

However, if they were to increase their contribution rate to 10%, the annual savings would amount to $13,000 including the 3% employer match, resulting in a substantially larger retirement fund. With the higher contribution rate of 10%, the 25-year-old would have amassed a retirement fund of around $2.6 million by age 65, assuming the same 7% average annual return.

This substantial difference showcases the power of higher contributions, allowing the individual to retire with financial security and the ability to enjoy a comfortable lifestyle.

How to Contribute to Your 401(k) Plan for Retirement

Pros of a 401(k) for Retirement Planning

401(k) plans come with the significant benefit of tax-deferred growth.

Tax-deferred growth refers to the increase in value of an investment in which the taxes on the investment’s earnings are not paid until a later date, typically upon withdrawal. In other words, while the investment grows and earns interest, dividends, or capital gains, no taxes are due on those earnings until they are withdrawn or distributed. 

The primary advantage of tax-deferred growth is the compounding effect. Because taxes aren’t taken out annually, the entire amount of earnings is reinvested and can earn even more. Over time, this can lead to significantly more growth compared to an account that’s taxed annually.

Many employers provide matching contributions, amplifying the amount saved. The array of investment options within a 401(k) can cater to different risk tolerances and financial objectives. Employees have the option to borrow against their 401(k), though it’s generally not recommended. High contribution limits make 401(k)s ideal for those looking to save sizable amounts.

Pros of a 401(k) for Retirement Planning

Cons of a 401(k) for Retirement Planning

There are some cons to 401(k)s, so it’s important to review some of the downsides. Early withdrawals from a 401(k) can incur hefty penalties and taxes. Investment options can be limited compared to other retirement accounts, potentially hindering diversification. Some plans come with high fees that can eat into overall returns. 

Unlike Roth IRAs, traditional 401(k) distributions are taxable upon withdrawal. It might be complex for individuals to understand all plan details, potentially leading to sub-optimal choices. In fact, if you want to feel more confident in your future retirement, I recommend that you seek the advice of an experienced fiduciary Wealth Manager. 

Contribution Limits of a 401(k) Plan

Each year, the IRS sets limits on how much individuals can contribute to their 401(k) plans. For 2023, the contribution limit might be adjusted based on inflation and other economic factors. 

Catch-up contributions are allowed for those aged 50 and above, letting them save more as they near retirement. These limits do not include employer matches, which can further boost retirement savings. It’s essential to be aware of these limits to maximize contributions without incurring penalties.

The 401(k) contribution limit for 2023 is $22,500 for employee contributions. If you’re age 50 or older, you’re eligible for an additional $7,500 in catch-up contributions, raising your employee contribution limit to $30,000.

401(k) vs IRA for Retirement Planning 

Both 401(k)s and IRAs are powerful tools for retirement savings. While 401(k)s are employer-sponsored, IRAs are individual retirement accounts anyone can open. IRAs often offer a broader range of investment choices compared to 401(k)s. 

However, 401(k)s typically have higher contribution limits, especially when including employer matches. The choice between the two often depends on individual circumstances, financial goals, and the availability of employer-sponsored plans.

401(k) Updates for 2023

As financial landscapes evolve, so do regulations and provisions for retirement accounts. In 2023, there may be updates regarding contribution limits, withdrawal rules, or other plan features. 

It’s vital to stay informed about these changes to optimize retirement planning strategies. New legislation or economic shifts can impact how 401(k) plans operate. Regularly consulting with your Wealth Manager or HR departments can ensure individuals remain up-to-date.

Required Minimum Distributions i.e. What You Have to Withdraw at Retirement

Required Minimum Distributions (RMDs) are amounts that retirees must withdraw from their 401(k) plans starting at a certain age, currently 72. The amount is calculated based on life expectancy and the account balance. 

Failing to take RMDs can result in significant tax penalties. While RMDs apply to traditional 401(k)s, Roth 401(k)s also have RMD rules unless rolled into a Roth IRA. Planning withdrawals strategically can help manage tax implications during retirement.

What to Do with Your 401(k) When You Switch Employers

When changing jobs, individuals have several options for their 401(k) funds. They can leave the money in the old employer’s plan, though they may no longer be able to contribute. Another option is to roll the funds into a new employer’s 401(k) or into an IRA. Cashing out is another choice but comes with potential penalties and tax implications. It’s crucial to weigh the pros and cons of each option and possibly consult with a Wealth Manager.

Common Questions about Retirement Planning and 401(k) Plans:

Common Questions about Retirement Planning and 401(k) Plans:

What is a good 401(k) amount to retire?

A good 401(k) amount to retire largely depends on individual lifestyle and expenses, but many financial experts suggest having 8-10 times your final salary saved by retirement age. The goal is to have sufficient funds to cover 70-85% of your pre-retirement income annually during your retirement years.

A 401(k) represents just one avenue among various account types available for pursuing your financial objectives, including taxable accounts and Roth accounts. Seeking guidance from a Wealth Manager to comprehensively assess and monitor the diverse assets you’re accumulating by type can be a prudent approach, ensuring you stay on track towards your retirement goals.

How much should I have in my 401(k) if I want to retire at 55?

If you aim to retire at 55, you should consider having saved at least 10-12 times your annual salary in your 401(k) by that age, given the earlier retirement age and potential for a longer retirement period. Early withdrawals before age 59½ may also incur penalties unless specific criteria are met.

How much will a 401(k) grow in 20 years?

The growth of a 401(k) over 20 years depends on the contribution amount, employer match, investment choices, and annual returns. Assuming an average annual return of 6-8%, your 401(k) can potentially double roughly every 9-12 years, depending on compounding frequency and market performance.

Is a 401(k) better than an IRA?

Both 401(k)s and IRAs offer unique advantages. A 401(k) often includes employer matches, allowing for higher total contributions, while an IRA may provide more investment options and flexibility. The best choice depends on individual needs, access to employer-sponsored plans, and financial goals.

Does a 401(k) gain interest?

A 401(k) doesn’t typically earn “interest” in the traditional sense. Instead, it earns returns based on the investments selected, such as stocks, bonds, or mutual funds. The returns can be in the form of dividends, capital gains, or interest from fixed-income investments.

Can I pull money out of my 401(k)?

Yes, you can withdraw money from your 401(k), but doing so before age 59½ often incurs a 10% early withdrawal penalty and the amount is subject to taxes. There are exceptions for specific situations like financial hardships, buying a home, or medical emergencies, but it’s essential to understand the rules and potential implications.

How 360 Financial Can Help You Plan for Retirement 

Unlock the future you envision with 360 Financial. With expert insights, financial planning tailored to your needs and goals, and a big-picture approach, we turn your work-optional dreams into actionable plans. Begin your journey to a secured, fulfilling retirement with the guidance of 360 Financial.

Work with a Financial Advisor Online or In Person

If you need a wealth management team to help you achieve your big-picture goals, we recommend scheduling a call with a financial advisor at 360 Financial.

360 Financial is one of Minnesota’s best independent wealth management firms. We work with clients in Minnesota and across the US. If you’d like to work with a team that always puts your best interests first and is committed to helping you create a lasting legacy, please get in touch. 

About the Author

William Grant

Will Grant, CFP

Will Grant enjoys empowering people to make informed decisions and seeing the positive impact his guidance can have on their lives.

Prior to joining 360, he spent seven years serving hundreds of clients at a boutique RIA focused on healthcare executives with equity compensation and then at a large, independent RIA. He earned a Bachelor of Science degree in Finance from Miami University and holds his Series 7 and 63 licenses through LPL Financial and his 65 license through 360 Financial.

Will lives in Minneapolis with his fiancée, Melissa. In his free time, he enjoys competing in triathlons, golfing and is an active member of the Minnesota Leadership Council for the Chick Evans Scholarship Foundation, which he was a recipient of.

Schedule a 15-minute Call with Will

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If you need financial planning assistance and a wealth management team to help you achieve your big-picture goals, we recommend scheduling a call with a financial advisor at 360 Financial.

360 Financial is one of Minnesota’s best independent wealth management firms. We work with clients in Minnesota and across the US. If you’d like to work with a team that always puts your best interests first and is committed to helping you create a lasting legacy, please get in touch.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Financial Management 101: Business Owners, Are You Doing Your Homework?

As a business owner, prudent financial management can help ensure your business remains healthy and stable. But what does good business financial management look like in practice? Here are four tips that may benefit business owners while focusing time and effort on the core of the business.

Pay Yourself First

Although it is tempting to sink all your profits back into your business operations, especially for very young businesses, paying yourself first may help you better understand the revenues your business needs to generate to remain profitable. And if your business ultimately does not work out, drawing a salary throughout its life may ensure that your hard work had a purpose and served to improve your life.

Take Advantage of Loans

You may be reluctant to take on debt for similar reasons that you may want to eschew a salary—you do not want to have any loan obligations you may not be able to repay.

Nevertheless, loans may help manage challenges, especially when you are in a startup phase. The proceeds from loans may help you pay personal expenses, purchase inventory or equipment, and hire additional employees, allowing your business to grow more quickly. When you utilize loans effectively, you may be better able to generate the cash flow needed to repay them.

Spread Out Your Quarterly Tax Payments

Sometimes, it might be tough to come up with the funds needed to make quarterly estimated tax payments on the dates these payments are due. In these situations, paying your tax payments on a monthly basis may make it easier to fit these payments into your budget. The amount you pay monthly may be less difficult than having to have a much larger amount when it is time for quarterly payments. By simply adding a line item for taxes to your monthly budget, you may manage the stress that arises from having to come up with tax funds every few months.

Evaluate Investment Expenditures and ROI

Not all investments are clear winners. Without data, it might not be easy to see this. By measuring your expenditures plus your return on investment (ROI), you may see where your money deploys and whether it works as it should. Periodically evaluating your investments may help you discover ineffective methods and allow you to recommit to marketing efforts and other investments that are paying off.









Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

This article was prepared by WriterAccess.

LPL Tracking #1-05372230

Understanding 401(k) and IRA Withdrawals for Education Expenses

A student’s education expenses may be reduced when a parent uses their tax-advantaged retirement account to help cover tuition and other related costs. With many students graduating with college loan debt, using a 401(k) or IRA may help lessen the burden of paying off education-related debt. However, before deciding to withdraw from a 401(k) or an IRA, knowing the rules and how they may impact you is essential.

Usually, if one withdraws money from a 401(k) or IRA before age 59 1/2, they will pay a 10% penalty and taxes on the withdrawal. But, the 10% penalty does not apply to 401(k)s and IRA withdrawals when used for ‘qualified’ education expenses. The IRS views qualified education expenses as the amounts paid for tuition, fees, and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution. Qualified expenses include:

  • Tuition and enrollment fees
  • Books and equipment
  • Student activity fees

These expenses are not considered qualified expenses:

  • Room and board
  • Insurance
  • Medical expenses (including student health fees)
  • Transportation
  • Similar personal, living, or family expenses
  • Sports, games, hobbies, non-credit courses

Here’s what you need to know when using your 401(k) or IRA for education expenses:

401(k) withdrawals- If your employer’s 401(k) plan allows for withdrawals for education expenses, you can withdraw from your 401(k) and avoid the IRS’ 10% early withdrawal penalty. You may also take a loan from your 401(k) plan; visit with your plan administrator or human resources department to understand how the rules may impact you.

If you take a loan, you may be able to take a tax credit when you file taxes for the year you paid the expenses; however, not in the year, you get the loan or the year you repay the loan. Because this may need clarification, consult your tax professional before taking a 401(k) loan.

Remember that penalty-free does not mean tax-free. Since contributions to a 401(k) are made pre-tax, taxes will be due on the amount you withdraw for education expenses. It’s essential to keep records of each education expense for tax filing purposes.

401(k) Roth IRA withdrawals- The same rules as 401(k) withdrawals apply to a Roth 401(k), but only if the employer’s plan permits withdrawals for qualified education expenses.

IRA withdrawals- IRA withdrawals are IRS 10% penalty-free if used to pay for qualified education expenses, regardless of the account owner’s age. However, taxes will be due on the withdrawal amount in the year taken.

Roth IRA withdrawals- Contributions to a Roth IRA can be taken out penalty-free for qualified education expenses at any time after the account has been open for at least five years, even if the account owner is under age 59 1/2. Since Roth IRA contributions are made with after-tax dollars, no taxes are due on the withdrawal.

Investing in education for your child is an investment that pays off over time. Suppose you are considering a 401(k) or IRA withdrawal to help pay college expenses for your child. In that case, your financial professional can help you understand how taxes and early withdrawal penalties may impact your situation.






Important Disclosures:

Content in this material is for educational and general information only and not intended to provide specific advice or recommendations for any individual.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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It’s Never Too Late to Improve Your Financial Awareness

Financial education is constantly evolving. As investments, financial priorities, and the economy change, so do financial strategies and plans. To stay on top of your retirement and ensure that you are on your way toward your financial goals, it’s vital to keep up with your financial education and awareness so that you will be able to make appropriate decisions regarding your financial future.

Whether you are preparing for your retirement, just starting your retirement journey, or are already a seasoned retiree, below are a few considerations to keep in mind as you continue on this path.

Be Mindful of Your Budget

Budgeting carefully and appropriately will help reduce your risk of a financial setback and better prepare for unexpected expenses. Your earning power is usually reduced when you retire, and your budget will be more limited to what you have been able to put away, along with a monthly Social Security payment. By limiting expenses and creating a budget that allows for savings and emergency expenses, you will hopefully be able to stretch your nest egg throughout your retirement.1

Fraud Proof Your Retirement

Older adults are often the target of scammers and fraud. A trusting nature and the desire to help those in need that many in this age group have makes them especially vulnerable to those who want to prey on the kind-hearted. You should consider putting fraud safeguards in place to help reduce your risk of becoming a victim. These can include putting your phone numbers on “do not call” lists, using fraud protection features on debit and credit cards, having your credit monitored, and setting up alerts for family members to be notified of large or unusual withdrawals from your accounts.1

Research All Social Security Benefit Options

Many overlooked aspects of Social Security leave many seniors missing out on benefits they may be entitled to but don’t know to apply for. More commonly overlooked Social Security benefits include:

  • Spousal benefits
  • Survivor benefits
  • Divorced spouse benefits
  • Disability insurance2

Plan for Medical Expenses and Insurance Costs

As you age, you are more likely to require costly medical testing and treatment to maintain your health. Unfortunately, medical costs continue to rise each year. One of the first steps to take to manage medical costs is to find appropriate Medicare coverage to ensure that you can minimize monthly costs and the cost of your medical needs. You will also want to plan for future high medical costs and expenses, including long-term care, even if you have a good healthcare policy in place. Including medical expenses in your monthly budget will help with this as well as purchasing insurance policies, such as long-term care, to provide additional cost coverage. 2








Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Please keep in mind that insurance companies alone determine insurability, and some people may be deemed uninsurable because of health reasons, occupation, and lifestyle choices.  Guarantees are based on the claims paying ability of the issuing company.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

LPL Tracking #1-05372230


111 Money Tips for Older Adults, US News and World Report, https://money.usnews.com/money/personal-finance/slideshows/11-money-tips-for-older-adults

2 A Guide to Finance for Seniors, Senior Living, https://www.seniorliving.org/finance/

Retirement Re-education: Back to School Time for Retirement Planning

Retirement planning is a constantly evolving process. Strategies that may have worked fine a few years ago may no longer be the optimal direction to continue. Your life may have taken unexpected turns, you may have different retirement goals you now wish to achieve, or you’ve realized your previous investments may not be working as well as anticipated to help you reach your financial goals.

Now is the time to consider a ‘retirement re-education’ by reviewing your retirement plan and overall strategies to see if they still align with your greater plans and goals.

Evaluating Your Current Plan

When sitting down to review your current retirement plan, you may want to:

  • Check your current investments: Markets have seen significant fluctuations throughout the years, so it is crucial to observe if your investments remain on track to get you toward your retirement goals. Make sure fund percentage balances are still appropriate and that your portfolio is well-diversified and in line with your current situation and future plans.
  • Check for contingencies: Ensure you have protection in place should the unexpected occur. This can start with insurance policies addressing long-term care, disability, and even death. You also want to ensure proper medical coverage to avoid being responsible for major medical expenses.
  • Ensure your retirement plan is tax-efficient: Seeking tax benefits will help you find ways to minimize taxes in your retirement portfolio. This focus can include placing taxable investments into tax-deferred accounts.
  • Evaluate changing family needs: If you have experienced recent adjustments in your family’s situation, consider how those changes can affect future finances and if any adjustments need to be made.1

Why You May Need to Revise Your Retirement Plan

Giving your retirement plan a once-over every couple of years is generally a good practice, but there may be situations when revising it sooner may be more urgent. Reasons to consider a revamp include:

  • Life event changes: If you have had significant life event changes, such as a new marriage, a divorce, a serious illness, the birth of a child, providing for step-children or grandchildren, or the death of a spouse, you may need to make significant changes to your retirement plan to realign with your new future goals.
  • Lifestyle changes: Moving to a new state, having significant changes in housing and related costs, or considerable health changes all may warrant a change in direction with your retirement goals.
  • Dramatic economic fluctuations: If domestic or global financial conditions have become unpredictable or there have been significant market fluctuations recently, it’s smart to review possible effects on your retirement investments. Economic situations that may prompt an urgent review include rising or falling interest rates, inflation, recessions, and significant Social Security changes.1







Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risks including possible loss of principal.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

LPL Tracking #1-05372230

1- 5 Ways To Adjust Your Retirement Planning Annually, Forbes, https://www.forbes.com/sites/nextavenue/2020/03/05/5-ways-to-adjust-your-retirement-planning-annually/?sh=4110847f52af