Unlocking The Full Potential Of Your 401k

Getting Started with Your 401k

For many, your 401k may end up being your largest financial asset and a key part of your retirement.

Whether you’re just starting out, and contributing to a 401k for the first time or if you have been investing in one for a while, I think you will find value in the information provided here on this page.

With new rules and changes to 401k plans happening all the time, like the Secure Act and the Secure Act 2.0, my goal in creating this page is help you stay on top of the latest tips and strategies that can help you get the most out of your 401k.

Benefits of Starting Early: The Power of Early Investment

Consider This Scenario…

Meet Steve and James, both 30 years old and successful in their careers.

Steve decides to start investing in his 401k plan right after his 30th birthday, contributing $10,000 per year.

James feels he has too many expenses and prefers to enjoy some “fun stuff” instead of investing in his 401k. He delays his contributions for 10 years. It’s only after his 40th birthday, inspired by Steve’s success, that James starts contributing $10,000 per year to his 401k.

Who Ends Up with More Money?

Assuming they both earn an average annual return of 7%, and check their account balances on their 65th Birthday. Here’s how it looks…

Steve’s 401k balance grew to $1,382,368
James’s 401k balance, however, grows to just $632,490.

That’s a staggering difference of $749,878! Over twice as much!

Even if James were to double his contributions to $20,000 per year, his account would grow to $1,264,980—still short by $117,388. Furthermore, James would have contributed a total of $500,000 compared to Steve’s $350,000.

Add in a company match, and these numbers would have heavily favored Steve’s strategy to start early even more!

The moral of the story…Start saving as early as you can!

Consider just one more thing. If Steve started saving the $10,000 per year after his 25th birthday, assuming a 7% growth rate his account would grow to $1,996,351.

The $50,000 Steve contributed in his 20’s (from 25 to 29) added $613,983.

The Power of Compound Interest!

How Does a 401k Work?

401k plans are retirement savings accounts offered through employers that can help you save money for your retirement. They are super convenient because your contributions are deducted right from your paycheck.

There are also tax advantages and depending on your employer, you may also be eligible for a matching contribution. (free money!)

Pay Taxes Now or Pay Taxes Later: The 4 Types of 401k Contributions

1. Traditional 401k (Save money in taxes now, Pay taxes later)

When you direct the money into your 401k before taxes, you invest in the Traditional 401k, and your contribution does not count toward your taxable income for the year.

Ideally after age 59 1/12 to avoid penalty. (more on this later on the page)

2. Roth 401k (Pay taxes now, save money in taxes later)

With the Roth 401k, there is no immediate tax benefit at the time you make your contributions. The amount you contribute will be included in your taxable income for the year, the same way it would have if you elected to receive the money in your paycheck. The benefit of the Roth is that all of your withdrawals as long as they’re qualified are 100% tax free. This includes not only your original contribution, but the growth as well.

***In both the Traditional and the Roth, Distributions before age 59 1/2 may be subject to a 10% premature withdrawal penalty in addition to any taxes you may owe.

3. Employer 401k Matching Contributions (Free Money)

Many 401k plans have a feature where your employer will make a matching contribution to your plan. This is literally free money, so you don’t want to miss out! My general recommendation would be to contribute enough to maximize the amount of match you can get from your employer.

Think of match like a bonus or additional compensation. But if you don’t contribute you won’t get it!

How 401k Matching Works (2 Types of 401k Match)

Full Match: You will receive a match for 100% of the amount you contribute, usually up to a certain percentage of your salary.

Full Match Example; Betty works for ABC Company and has a 100% 401k match up to the first 6% of her base salary. If Betty’s base salary is $100,000 per year and Betty contributeds at least $6,000 or 6% of her salary, ABC would match her dollar for dollar up ot $6,000 or 6% of her salary.

Partial Match: You will receive a percentage of the amount contributed, up to a certain percentage of your salary.

Partial Match Example; Nolan works for XYZ company and has a 50% match up to the first 8% of his base salary. If Nolan’s base salary is $100,000 per year, XYZ would match up to $4,000 as long as he contributes at least $8,000 to the 401k.

401k Vesting (How it works)

Vesting is a way for employers to retain employees by requiring them to stay with the company for some minimum amount of time before the matching contributions are yours to keep. But don’t worry, your contributions are always 100% vested from day 1. There is never a vesting period for money you put in.

401k Vesting 2 Examples

All 401k matching contributions vest at the end of a 3 year initial vesting period. So if you were to leave the company anytime during the first 3 years of employment you would lose all of the money your employer contributed on your behalf, including any growth that may have occurred as well.

5 year vesting schedule where each year 20% of your matching account vests and is yours to keep even if you leave the company. So, if you left after 2 years 40% of your account would be vested and yours to keep. After 5 years all matching contributions would be vested.

401k Matching Contributions Now Eligible to Direct to Roth

With the passing of the SECURE Act 2.0 in 2022, employer matching contributions can now go into your Roth 401(k). This is optional, and not all workplace plans offer it. Before the law changed, all employer matches went into your pre-tax traditional 401(k).

If you choose the Roth 401(k) match, that amount becomes taxable income. You’ll receive a 1099-R reporting it at tax time.

Taxes usually aren’t withheld from your paycheck for this match. So, adjust your payroll withholding or make estimated tax payments. This helps you avoid a surprise tax bill—or a penalty—when you file.

4. After Tax 401k Contributions

According to the Plan Sponsor Council of America, Roughly 21% of company plans offered after-tax 401(k) contributions in 2021. If you work for a large company and/or have one of the larger 401k providers such as Fidelity or Vanguard you may have a better chance of having this option.

If available in your plan, the after-tax savings option could allow you to continue to save money in a tax deferred savings account even after you’ve hit the normal contribution limits for the standard Traditional or Roth 401k. (more on the contribution limits in the next section)

What Exactly is an After-Tax Savings Option and How Does It Work?

With after-tax savings, you contribute money after taxes. The money grows tax-deferred over time.
This differs from a Traditional 401(k), which uses pre-tax contributions and grows tax-deferred.
A Roth account also uses after-tax contributions, but it grows completely tax-free.

Why Would You Want to Contribute to an After-Tax 401k Account?

First, this really only makes sense after you’ve already maxed out your annual contribution limit for your 401k, and at least considered a Roth IRA contribution. (if you qualify)

But, if you’re still looking, to save money for your retirement the after-tax savings account may be a good option.

While the after-tax savings account has been an option in many employer sponsored retirement plans for decades, it wasn’t until a 2014 IRS Tax Notice, that really made this interesting.

IRS Tax Notice 2014-54, provided clarification that these after-tax saving accounts could be converted to a Roth IRA. So in effect, it’s become a way, to get more money in a Roth IRA. Even if you’ve already maxed out your 401k, and even if you make too much money to contribute to a Roth IRA directly.

After Tax 401k Example

Mary is already maxing out her annual contribution limit for her 401k plan including the catch up provisions, since she’s over 50, but she still would like to save additional money for her retirement.

She could open a normal taxable brokerage account, but then she would be subject to annual taxes on her capital gains, dividends and interest.

Instead she decides to contribute $10,000 to her employer after-tax account with ongoing deductions from her monthly paycheck. As her after-tax account grows she can periodically, as the plan allows, convert those assets to a Roth IRA or if the plan allows, an in-plan Roth Conversion. I’ve even seen some 401k plans that will do this for you automatically.

This after-tax to Roth strategy is often referred as the Mega Back-door Roth Strategy

The 2025 401k Contribution Limits

Annual 401k Contribution Limit

For 2024 the maximum annual employee contribution is $23,500. The amount can be contributed to either Traditional or Roth or split between the two. There are no income restrictions for contributing to either one.

Catch Up Contributions

For individuals aged 50 and older, you are allowed an extra “catch up” contribution. For 2025 the catch up contribution is $7,500.

If you’re 50 or older you can contribute a total of up to $30,500 to your 401k

Increased Catch-Up Contributions for Ages 60-63

The Secure Act 2.0 created an enhanced catch up provision for individuals aged 60 to 63.

During just those 4 years, the catch up contribution will increase to the greater of $10,000 or 50% more than the regular catch up amount.

After 2025, the catch up contributions will be indexed annually for inflation.

High Earner Catch-Up Contribution Rule

Secure Act 2.0 added a new rule for high earners making $145,000 or more per year. These individuals must direct all catch-up contributions to a Roth account. The IRS originally planned to start this rule in 2024. IRS Notice 2023-62 delayed the rule by two years, It will now take effect in the 2026 tax year.

Adding it up: Total Maximum 401k Contribution Limits

As mentioned earlier on this page, your 401k contributions can consist of;

Regular 401k Contributions (Roth or Traditional)
Employer Matching Contributions
After-Tax Contributions

For 2024 the total for all contributions to an employer sponsored retirement plan is $66,000 per year. If you’re 50 years old or older, with the catch up contribution of $7,500, you would be eligible to contribute up to $73,500.

As mentioned earlier, not all 401k plans will have a match or the option to contribute to an after-tax account. Even if you do have an after-tax option, your employer could still limit the amount that you can contribute, even if you still have room within the IRS limits

How Much Should you Save in Your 401k?

Just because you can save this much money in your 401k doesn’t necessarily mean that you should save this much.

I know this may go against what many financial advisors and guru’s may tell you, but I believe in balance.

How much to contribute to your 401k or save for your retirement is always a trade off, between having “fun” with the money today vs saving it for your future.

I’ve seen too many cases where someone was way too focused on saving and investing, and, in almost an unhealthy way, addicted to watching the numbers on their statements. They sacrificed too much and bypassed a lot of things they could have done along the way, like taking vacations with family. Some people may not live to enjoy their retirement and others may find the things they wanted to do aren’t as enjoyable or even possible due to health issues.

The point is, money should be viewed as a tool for what it can do for you, and how it could potentially enhance your life. By no means does this mean that you shouldn’t save money for your future, but you want to have a clear vision on what the appropriate balance is for you, between saving money and enjoy things today.

Having a detailed long term plan can help you do that. You can check out ours here.

How to Get Money Out of Your 401k

You typically invest 401(k) contributions until at least age 59½ to avoid early withdrawal penalties. In this section, I’ll explain how to access your 401(k) while working or after retirement. We’ll look at strategies to avoid penalties after separating from your employer or transitioning into retirement.

In-Service Withdrawals: Getting Money Out of Your 401k While You’re Still Working

Some 401k plans have a feature that could allow you to rollover a part of, or even your entire 401k to an IRA while you’re still working and actively contributing to the plan.

**** Remember, you have 4 options with your 401k before you rollover any money.**

Keep your 401k with your plan
Rollover your 401k to a new employer plan (if allowed)
Roll it over to an IRA Account
Cash it out. (Taxes and potentially an early withdrawal Penalty may apply)

Rolling over your 401k may provide additional investment options, ability to work with a financial advisor and consolidate financial assets. However, there may disadvantages of doing a rollover as well including loss of some tax and withdrawal benefits.

** For more on pros and cons of doing a 401k Rollover see below.

What Can I Rollover as an In-Service Withdrawal?

While all plans have a different set of rules some plans here are some common sources for an In-Service withdrawal. Check with your plan administrator to see what your plan allows.

Company Match: As long as it’s vested, many 401k plans allow for a rollover of company match contributions.

Age 59 1/2: For most 401k plans that we see, it is common for you to have the ability to rollover your entire 401k plan to an IRA after reaching the age of at least 59 1/2. Even if you’re still an active participant.

After-Tax Savings: With after-tax savings you basically have two choices.

How a 401k Loan Works

Most 401(k) plans include a loan provision that lets you borrow from your account. You can typically borrow up to 50% of your account balance or $50,000—whichever is less. Your plan sets the interest rate, usually the Prime Rate plus 1–2%.

As of June 2024, the Prime Rate is 8.5%, so loan rates could range from 9.5% to 10.5% or more. You repay the loan through payroll deductions, with terms usually set at 5 or 10 years. If the loan is for a home purchase, you often get 10 years. Otherwise, it’s usually 5 years.

When the loan begins, the borrowed amount is removed from your investments. That money is then “invested” in your loan until it’s repaid. Some people believe the loan is free since you pay interest back to yourself. But you’re losing the potential growth your original investments might have earned.

What Happens to Your 401k Loan When you Retire or Leave the Company?

When you retire or change jobs with an outstanding 401(k) loan, you may need to repay it quickly—often within 30 days or less.

If you don’t repay the loan within the allowed time, your plan will treat the remaining balance as a distribution. You’ll owe income taxes on that balance, and if you’re under age 59½, you’ll also face a 10% early withdrawal penalty.

How a 401k Hardship Works

According to the IRS, a 401(k) hardship distribution covers an “immediate and heavy financial need.” The withdrawal is limited to the amount needed to cover that financial need—no more.

Examples include a disability or large unexpected medical bills, not something like replacing a broken dishwasher. You don’t need to repay a hardship withdrawal, but you will owe income taxes on the distributed amount. If you’re under 59½, you won’t pay the usual 10% early withdrawal penalty.

Getting Money Out of Your 401k When You Retire or Separate Service

When you retire or separate service and have a 401k plan with your employer you have some options. Understanding your options before you do a rollover, can potentially save you from making a costly mistake.

As mentioned earlier on the page you have 4 basic options for what to do with a 401k when you retire or change jobs.

Keep your 401k with your plan
Rollover your 401k to a new employer plan (if allowed)
Roll it over to an IRA Account
Cash it out. (Taxes and potentially an early withdrawal Penalty may apply)

401k Rollover Pros (why you should rollover your 401k)

Access to more or different investment options
You want to work with a financial advisor on your investment strategy
Lower fees (potentially, see How much does your 401k really cost below)
Consolidation of your financial assets
Access to a special tax treatment (see below)

401k Rollover Cons (why you shouldn’t rollover your 401k)

You like your plan and the investment options and fees
You separated from the company in the year you turned 55 or later, but are not yet 59 1/2 (see age 55 rule)
You want to do a back door Roth IRA Contribution Strategy. (the back door Roth contribution strategy only makes sense if you don’t have any other IRA accounts. If you rollover your 401k to an IRA, the new IRA would dramatically complicate your ability to use this strategy)

Special Tax Treatment of Company Stock In Your 401k (Net Unrealized Appreciation or NUA)

If you own employer stock inside your 401k plan, you may qualify for a special tax option called Net Unrealized Appreciation (NUA). This special tax treatment is only for stock in the company you work for.

How NUA Works

he 401k NUA rules allow you to distribute company stock from your 401k to a regular non-retirement brokerage account. (not an IRA).

At the time of the distribution you would pay taxes at your ordinary tax rate on just the cost basis of the stock.

The gain then gets classified as Net Unrealized Appreciation. Taxes would be paid at the time the stock is sold at your long term capital gains tax bracket. There is no need to wait 12 months as you normally would for the long term capital gains tax treatment. You could sell the stock immediately.

Any growth that occurs from the time the stock is distributed to the time the stock is sold would be taxed at the short term capital gains tax rate. If held for 12 months or longer it would qualify for the long term capital gains tax rate.

Net Unrealized Appreciation (NUA) Example

Cynthia is a Marketing Executive for Coca Cola and has $150,000 of company stock in her 401k plan. She is over 59 1/2 and currently in the 24% tax bracket with $75,000 of room before the next bracket. After calling her 401k provider, she learns that her cost basis on the shares is just $50,000.

After discussing with her advisors, she decides to distribute her stock from the 401k, using NUA treatment to her non-retirement brokerage account. In doing so, she pays taxes at her ordinary tax rate of 24% on the $50,000 cost basis. The $400,000 of gain in the stock is not taxed at the time of the distribution, but is classified as Net Unrealized Appreciation.

A Month after distributing the stock, the stock is now worth $160,000, and she decides to sell it all. Here’s how it breaks down…

NUA Example

Here’s how the taxes on her NUA Stock work
Tax on the $50,000 cost basis paid at her ordinary income tax rate of 24%	$12,000
Tax on the Net Unrealized Appreciation $100,000 (due to sale of stock) Taxed at the long term capital gains rate 15%	$15,000
Tax on $10,000 gain from the time stock was distributed. Taxed at the short term capital gains tax rate 24% (less than 12 months, her ordinary tax rate)	$2,400
Total Tax	$29,400

If Cynthia instead kept the stock in her 401k and sold it then

Here’s how the taxes would have worked if she sold the stock in her 401k and distributed the proceeds ($160,000)
$75,000 Taxed at the 24% bracket (amtount remaining before 32% bracket)	$18,000
$85,000 taxed at the 32% ($160,000 minus $75,000)	$27,200
Total Tax	$45,200

Using NUA Cynthia saves $15,800 in taxes!

Net Unrealized Appreciation is not for everyone. It needs to be considered within a complete long term financial plan. Understanding not only how it may impact your plan and your taxes now in the short term but also the long term impact as well.

What Is the Age 55 Rule And How Does It Work?

Did you know that you may not have to wait until turning 59 1/2 to access the money in your 401k without paying a penalty?

That’s right! If you separate service from your company in the year you are turning 55 or later, you can take withdrawals from your 401k without paying a penalty. Even if you’re still not 59 1/2.

This rule only applies to your 401k not an IRA. So if you rollover your 401k to an IRA you are not going to be able to use this option.

How Much Does Your 401k Really Cost?

Contrary to what many people believe, your 401k plan is not free! While it is true that your company is probably paying some administrative costs for setting up and maintaining the plan, you, the participant are paying for all of the investment costs associate with the individual investments you select.

401k fee’s can vary wildly from one plan to the next and according to BrightScope/ICIData as of March 21, 2024, the average fees for a 401k plan with $1 billion or more in assets was just .27%, while smaller plans with less than $1 million in assets had an average fee of 1.27%.

That’s 5 times the average cost for a 401k plan if you work for a small company vs. working for a larger company!

How to Invest Your 401k

I’m not going to get too far into the weeds here on this page when it comes to choosing investments for your 401k. Everyone is going to be different when it comes to different types of investments and how comfortable you are with risk.

Generally speaking though, if you’re a younger investor with more time to retirement, you can afford to take on more risk with your portfolio, because you have time to “ride out” market downturns.

If you’re closer to retirement, you really want to be thinking about how, when and how much you may need to withdrawal from your retirement portfolio and have a strategy for dealing with that. My opinion, is if you will be needing to begin withdrawals within the next 5 years, you should consider shifting towards a more conservative portfolio.

Investing your 401k: 3 Categories of Investment

Your 401k plan may have 3 broad categories of investments you can choose from. Not all 401k plans have these, but this is what we see most often.

1. The Core 401k Menu

401k plans have core menu of investment options covering at least the basic broad investment asset classes such as Bonds, Stocks, Cash and International. Many 401k plans get even more specific on these funds, allowing participants to buy funds targeting a specific type of stock or bond portfolio. These funds likely have different objectives and different levels of risk.

2. Target Date Funds

Because building a portfolio from the core menu can be more complicated for some investors, many 401k plans have added in “Target Date Funds” as an easier alternative. In fact, many plans use the Target Date fund as the default investment option for plan participants.

How Does A Target Date Fund Work?

With a Target Date fund you select a year that most closely matches with the approximate year of your retirement.

For example; If you’re 35 years old and plan to work to age 65, you will be 65 in 30 years. If its now 2024 that puts your retirement in the year 2054. The plan probably doesn’t have a Target Date Fund for 2054, But they may have one for 2055. You just want to pick a Target Date Fund that gets you close to the year you’re planning to retire.

A Target Date Fund will slowly shift the risk level of your portfolio towards a more conservative asset allocation as you get closer to your retirement date. Every Target Date Fund has a different “glide path” and some may be more aggressive than others even if they have the same target year.

2022 was a Rough Year for Target Date Funds!

According to data from Morningstar Direct, in 2022, the median return for U.S. Based 2025 Target Date Funds was -15.4%. (2025 Target Date Funds are for those individuals closest to retirement!)

Target Date Funds do not “mature” and are not guaranteed in any way shape or form.

3. The 401k Self Direct Brokerage Option

What is the 401k Self Direct Brokerage Account? Basically it’s an account within your 401k plan where you can partition off a portion of your assets, or, if allowed even 100%, into a special account that acts a little more like a regular investment account.

While not all 401k plans have this, according to CNBC, in 2023 approximately 40% of 401k plans offered a Self Directed Brokerage Account or Self Directed Brokerage Window.

The potential benefit of the Self Directed Brokerage Account is that it can give you access to investments that are not part of the core investment menu. Depending on what your plan allows, you may be able to buy Individual Stocks, Mutual Funds or Exchange Traded Funds in your Self Directed Brokerage Account.

These additional options can really open things up for more sophisticated investors that want to get more involved in managing their 401k investments.

Using the self directed brokerage account is not for everybody and may riskier than sticking to Target Date Funds and the Core Menu.

There will also likely be additional fees associated with the Self Directed Brokerage 401k such as commissions every time you buy or sell a security. Mutual Funds and ETF’s that you purchase will also have fees. Make sure you fully understand all of the costs before you buy.

Dollar Cost Averaging

With a 401k plan you will likely be adding money to your account on a regular basis, most likely with every paycheck.

As money is contributed and invested to your account over time, sometimes themarket will be higher and sometimes the market will be lower. By continuouslyadding money to your account it tends to have a smoothing effect on marketvolatility by sometimes buying high and sometimes buying low.

Important to note, that dollar cost averaging does not eliminate risk!

Final Thoughts

Planning for retirement through your 401k isn’t just about contributing regularly—it’s about understanding the rules, taking advantage of available strategies, and making informed decisions that align with your goals. Whether you’re early in your career or nearing retirement, your 401k can be a powerful tool to help you build long-term financial security. With the right approach, you can turn this workplace benefit into a cornerstone of a well-designed retirement plan.

If you’re not sure whether you’re making the most of your 401k—or want a second opinion on your current strategy—we’d be happy to help. Feel free to schedule a quick call or explore our retirement planning services to see how we can support your goals.