Financial Planning Simplified: Everything You Need to Know About 401(k)s

At Valentine Insurance, we care not only about your current financial well-being but also your long-term security. Our goal is to help you build a stable future starting with a well-planned retirement. One of the best ways to secure that future is by taking full advantage of your employer’s 401(k) benefits. Whether you’re just beginning to invest or reevaluating your financial plan, this guide will walk you through the basics of 401(k)s and how they can play a vital role in your retirement planning.

What is a 401(k)?

A 401(k) is a tax advantaged retirement savings plan offered by many employers, allowing employees to contribute a portion of their paycheck toward retirement savings. What makes 401(k)s unique is that they allow dual contributions: one from you and one from your employer – maximizing your savings potential.

Your employer will deduct a set amount from your paycheck and deposit it directly into your 401(k) account. While this means you’ll have slightly less take home pay now, the money is growing for your future. The earlier you start contributing to your 401(k), the more you benefit from compound growth over time.

Benefits of Using a 401(k)

Here are a few key advantages:

• Tax Deferral: Your contributions lower your taxable income. For example, if your salary is $100,000 and you contribute $10,000 to your 401(k), your taxable income is reduced to $90,000.
• Tax-Free Growth: The money in your 401(k) account grows tax-free until withdrawal.
• Employer Match: Many employers will match a percentage of your contributions. If you contribute $10,000 and your employer offers a 50% match, you receive an additional $5,000 – essentially free money to boost your retirement savings. Make sure to check with your employer to maximize your benefits.

Roth vs. Traditional 401(k): Which One is Right for You?

When enrolling in a 401(k), you may have the option to choose between a Traditional or Roth account. The key difference lies in how your contributions and withdrawals are taxed:

• Traditional 401(k): You contribute pre-tax money, which lowers your taxable income for the year. However, when you withdraw the money in retirement, you'll pay taxes on it. This option is best if you expect to be in a lower tax bracket when you retire.
• Roth 401(k): You contribute after-tax money, so there’s no immediate tax break. However, your money grows tax-free, and you won’t pay taxes on qualified withdrawals (contributions or earnings) in retirement. This is a good choice if you think you'll be in a higher tax bracket later.

Some employers allow you to split contributions between both types to balance tax benefits now and in the future.

Getting Started with a 401(k)

We recommend that you start contributing to your 401(k) as soon as possible. Contribution flexibility allows you to adjust your savings rate at any time based on your financial situation.

Best Contribution Practices

• Recommended Minimum Contributions: Contribute at least enough to receive your employer’s full match. If your company matches 100% of contributions up to 6% of your salary, contributing the full 6% ensures you receive the maximum employer contribution.
• Maximum Contributions: As of 2025, the IRS allows individuals to contribute up to $23,500 per year. Be sure to check with your employer on the maximum percent you are allowed to contribute.

401(k) Commonly Asked Questions

• When Can I Access the Money in My 401(k)? Generally, you can begin withdrawing funds penalty free at age 59½. Early withdrawals may incur penalties unless exceptions apply.
• What Happens to My 401(k) If I Leave My Job? You have several options: leave it in your former employer’s plan, roll it into a new employer’s 401(k), transfer it to an IRA, or withdraw it (though taxes and penalties may apply).
• Are There Any Hidden Taxes or Fees? Some 401(k) plans have annual fees, which typically range from 1-2%. It’s important to review your plan's details.

Valentine Insurance Can Help You Prepare

As you plan for your retirement, it's essential to consider both your 401(k) and insurance needs to ensure a secure future. Contact us today for expert financial guidance tailored to your financial goals.