.png)
The average contribution into a 401K plan held by Fidelity, according to a study done in 2018, was 13.2%. Many Christian investors are losing out on free money at their jobs because they don't fully understand how their 401K retirement plan works.
But not you, because you follow me, A.B. Ridgeway. As Mr. Christian Finance himself, and, as my mom's favorite Christian financial advisor, I'm here to help you answer all your retirement questions so you can be rich and righteous.
If you're like most Christian investors, when you think about retirement planning, the first thing that comes to mind is often the 401K plan offered by your employer.
After all, it's the most common type of retirement plan out there.
However, 401K plans can be complex and it's not always easy to understand exactly how these plans work.
There's contribution limits, withdrawal rates, and penalties.
Today, we’re focusing on the withdrawal portion of the 401K.
Are you curious about how you can maximize the benefits of your 401k plan?
Let's dive deep into understanding contributions, withdrawals, and the tax implications.
What is a 401K?
A common misconception is that a 401K is an investment. But did you know that a 401K is actually a tax code? It’s used to identify a tax-advantaged retirement account.
When you say, "I'm going to contribute to my 401K," you really mean you're going to contribute into your 401K account.
You still need to choose the investments you are going to invest in, which is very crucial.
I come across individuals who contribute to retirement accounts but complain that their money isn’t growing.
Often, their money sits in cash, essentially a glorified savings account. They haven’t actually invested in anything that enables their money to grow. This is one of the biggest mistakes many Christian investors make.
The Importance of Employer Matching 401k Contributions
When you contribute to a 401K, you usually choose a percentage of your salary that you want to contribute, and often your employer will match a certain percentage of your contribution.
This employer match is essentially free money. For instance, if you contribute 6% of your salary and your employer matches that with another 6%, you’re essentially getting a 12% contribution to your retirement savings with half of it being free money from your employer.
So why doesn’t everyone contribute to their 401K? Misconceptions about 401Ks being evil or ineffective often deter people.
But if you’re putting your money to work in a savings account that pays practically nothing, a 401K with employer matches and potential investment growth makes a lot more sense.
Key Considerations Before Contributing to Your 401K
Before you decide to throw half of your check into your 401k, here are some important things you need to know:
Maximum Benefit Age: These are retirement accounts, with maximum benefits seen when you reach retirement age (59.5 years old, or 55 if separated from your company).
Early Withdrawal Penalties: Any withdrawals made before age 59.5 may result in a 10% early withdrawal penalty unless you meet certain exemptions.
Tax Deferred, Not Tax-Free: Contributions are tax-deferred, meaning you’ll pay taxes at the time of withdrawal.
Contribution Limits: For 2024, employee contribution limits are $23,000, with catch-up contributions of $7,500 available for those 50 and older. The combined contribution limit for employee and employer cannot exceed $69,000 for those under 50, or $76,500 for those 50 and up, or 100% of employee compensation.
Withdrawing Money from Your 401K: What You Need to Know
You might wonder, what do you do when you want to withdraw money from your 401K? Maybe an emergency comes up or perhaps you’re retired and ready to enjoy your savings. Here's the best way to approach withdrawals:
Case Study: An Emotional 401k Decision Gone Wrong
One of my clients, despite my advice, made an emotional decision to withdraw his 401K savings entirely and move it into a regular savings account. He paid the 10% early withdrawal penalty and an initial 20% withholding tax, assuming that was all he owed. A year later, he was hit with a hefty tax bill because his income jumped to a much higher tax bracket due to the large withdrawal.
This client’s impulsive decision cost him a substantial portion of his retirement savings. A proper financial plan could have saved him hundreds of thousands of dollars, demonstrating the value of careful planning and professional advice.
"Emotional financial decision-making is one of the fastest ways to lose hundreds, if not thousands, if not hundreds of thousands of dollars in seconds."
Planning for Tax Implications with Professional Help
Financial planning isn’t just about accumulating wealth; it's also about protecting it. When planning to withdraw large sums from your 401K, consider speaking with a financial advisor and an accountant to help you understand the tax implications and to strategize the best approach for your specific situation.
Benefits of a Financial Team:
Financial Advisor: Executes buys and sells, ensures your assets grow, and advises on the best financial decisions.
Accountant: Helps you understand your tax obligations and opportunities to minimize tax bills.
Lawyer: Assists with legal aspects of wealth management.
Understanding Rollovers: A Tax-Efficient Strategy
A tax-efficient way to access your 401K savings without incurring a hefty tax bill and penalties is through a rollover. You can transfer your 401K savings into a traditional Individual Retirement Account (IRA). This transfer maintains the tax-deferred status of your savings and allows them to continue to grow.
Steps for a Successful 401k Rollover:
Choose the Right Account: Ensure the account receiving the rollover is another tax-deferred account (e.g., a traditional IRA).
Complete the Rollover in Time: You typically have a 60-day window to complete an indirect rollover.
Understand Tax Implications: While a traditional IRA rollover defers taxes, rolling over to a Roth IRA may trigger tax liabilities.
The Role of a Financial Advisor
A financial advisor can guide you through the rollover process, ensuring all paperwork is completed correctly and helping you understand the long-term implications. By hiring a financial advisor, you transfer the liability of executing these financial strategies correctly from yourself to a professional.
Calculating the Value of a Financial Advisor
Consider this: a 1% annual fee for a financial advisor on $1.2 million is $12,000. The potential savings from one strategic piece of advice could save you hundreds of thousands in tax penalties and poor decision-making.
The client in the case study could have paid for a financial advisor for over 45 years and still benefited more than making the emotional decision on his own.
Conclusion: Plan, Don't Panic
At A.B. Ridgway Wealth Management, we emphasize that financial planning is more than just stocks and bonds. It's about preparing for your future and making informed decisions. A little planning can save vast amounts of money and prevent costly mistakes.
Ready to Secure Your Retirement?
Don’t be like my previous client who lost $550,000 due to an emotional decision. If you're retired, recently retired, or considering retirement, I encourage you to reach out and schedule a free consultation. We’re 100% virtual, ready to assist you anywhere in the continental United States.
Go to abrwealthmanagement.com and schedule your consultation today.
Want More? Check Out Our Podcast: Financial Advisors Say The Darndest Things
Monday: Bible study episodes focusing on scriptures about finances.
Wednesday: Financial planning topics like 401K plans, distributions, and withdrawals.
Friday: Current news topics you can discuss with friends over the weekend.
Subscribe to our newsletter to stay updated and join a community of Christian investors looking to live rich and righteously.
Time Stamps:
00:00 Introduction
00:39 401k Complexities
01:18 Contributions Explained
01:43 401k Investments
02:40 Tax Advantages
03:54 Employer Match
05:55 Important Considerations
09:00 Client Case Study
13:33 Tax Withholdings
19:27 Rollover Options
28:38 Get Professional Help
30:21 Subscribe
In this episode, A.B. Ridgeway, also known as Mr. Christian Finance, delves deep into the complexities of 401k retirement plans, focusing on the crucial aspects of contributions, employer matching, and the often-overlooked withdrawal process.
Drawing from his years of experience as a Certified Private Wealth Advisor®️ professional, A.B. Ridgeway breaks down the intricacies of 401k plans, emphasizing the importance of making informed decisions to avoid costly mistakes.
This episode is packed with valuable insights and practical advice for Christian investors who want to ensure their retirement savings are both righteous and abundant.
Key Takeaways:
Understanding 401k Contributions and Employer Matching-Many Christian investors miss out on free money because they don't fully understand how their 401k plan works. A 401k is not an investment itself, but a tax code for a retirement account. It’s crucial to not only contribute to your 401k but also to select appropriate investments within the plan. Employer matching is essentially free money, often equating to up to 6% of your salary, which can significantly boost your retirement savings.
The Importance of Investment Choices within a 401k-A common mistake among investors is assuming that simply contributing to a 401k is enough. Without actively choosing investments, your contributions may sit in cash, earning little to no return. This episode highlights the importance of reviewing your 401k statements to ensure your money is actually invested, rather than merely sitting idle in a glorified savings account.
Tax Advantages and Implications of 401k Withdrawals-Contributions to a 401k plan are tax-deferred, meaning they reduce your taxable income in the year they are made. However, withdrawals from the account are taxed as ordinary income. A.B. Ridgeway explains how proper financial planning can help you withdraw funds in a tax-efficient manner, potentially saving you thousands of dollars in taxes during retirement.
The Consequences of Early Withdrawals-Withdrawing from your 401k before reaching retirement age (59.5 years, or 55 if separated from your employer) can result in a 10% penalty, in addition to regular income taxes. This episode includes a cautionary tale of a client who made an emotional decision to withdraw early, resulting in a tax bill that wiped out nearly half of his retirement savings.
The Role of a Financial Advisor in Managing Your 401k-A financial advisor plays a critical role in helping you navigate the complexities of your 401k. A.B. Ridgeway stresses the value of professional guidance to ensure your retirement savings are maximized and protected. He also discusses the importance of having a financial plan in place to avoid costly mistakes, such as unnecessary fees or poor investment choices.
Quotes:
"Your 401k is not an investment—it's a tax code that gives you a tax-advantaged retirement account."
"Employer matching is essentially free money. If you're not taking full advantage of it, you're leaving money on the table."
"The emotional decisions you make today can have long-lasting financial consequences. It's crucial to consult with a financial advisor before making any significant moves."
Join our Newsletter and receive our free 19-page e-book "4 Financial Principles Every Christian Should Know"
As Christians, we were taught to be good stewards over our tithing and giving to the less fortunate. But when it came to our personal finances and investing we were left clueless on what the Bible says. What does the Bible say about managing debt, leaving a legacy, investing, and planning for your retirement? Mr. Christian Finance answers these and many other questions because we want to teach you how to become rich and righteous!
Meet A.B. Ridgeway:
A.B. Ridgeway, MBA, CPWA®️ (info@abrwealthmanagement.com) is the owner and Christian Financial Advisor with A.B. Ridgeway Wealth Management. With a decade in the finance industry, his goal is to give believers clarity around the most confusing topic in the Bible, money, and tithing. A.B. Ridgeway helps tithing Christians become cheerful givers but unlocking their money-making potential, so they can prosper and be the great stewards of the wealth God has entrusted them with.
*Disclaimer: This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. This is strictly for information purposes. We recommend you speak with a professional financial advisor.
Comments