As a nurse, you work hard to care for others. And it’s important to take care of you. One way to do this is through retirement planning. And you may want to consider a 401 (k) retirement plan to help supplement your post-career income. In this blog post, we’ll explore what 401(k) retirement plans are and how they can benefit nurses.
What is a 401(k) Retirement Plan?
A 401(k) retirement plan is an employer-sponsored account that allows employees to save and invest a portion of their income for retirement. Its name is from the section of the U.S. Internal Revenue Code (IRS) that governs these plans.
There are several types of 401(k) retirement plans that employers may offer. Let’s explore the different types of plans:
Traditional 401(k) Plans
These are the most common types of 401(k) plans offered by larger employers. In a traditional 401(k) plan, employees can contribute a portion of their pre-tax income to their retirement account. The contributions and any investment gains are tax-deferred until withdrawal.
Roth 401(k) Plans
Roth 401(k) plans allow employees to contribute a portion of their after-tax income to their retirement account. The contributions are not deductible, but qualified withdrawals, including earnings, are tax-free.
Safe Harbor 401(k) Plans
Small businesses may offer a Safe Harbor 401(k) plan. These plans must pass certain IRS non-discrimination tests. With Safe Harbor plans, employers must contribute to employees’ retirement accounts. This is through either matching or non-elective contributions.
SIMPLE 401(k) Plans
SIMPLE stands for Savings Incentive Match Plan for Employees 401(k) plans. Small businesses with less than 100 employees may offer a SIMPLE 401 (k) plan. SIMPLE plans have lower contribution limits and are easier to run compared with traditional 401(k) plans.
Solo 401(k) Plans
Solo 401(k) plans are designed for self-employed individuals or business owners with no employees, except for a spouse. These plans allow for higher contribution limits and offer both employee and employer contributions.
It’s important to note that all 401(k) plans are defined contribution plans. This means employee contributions and plan performance control the money available for retirement. Traditional pensions, on the other hand, are defined benefit plans funded by employers.
4 Reasons Nurses Might Consider a 401(k) Retirement Plan
401 (k) Retirement plans offer many potential benefits. Let’s explore some reasons nurses might want to consider from a 401 (k) retirement plan.
401(k) plans offer tax benefits that can help you save more for retirement. Contributing pre-tax income helps reduce your taxable income. This can help lower your tax bill. Also, tax-deferred growth allows your investments to compound over time. This helps optimize your retirement savings.
Many nursing jobs offer employer matching contributions to 401(k) retirement plans. This is free money that can help boost your retirement savings.
One fear shared among retirees is outliving money in retirement. By contributing to a 401(k) plan, the goal is to increase your retirement income. This can help support the lifestyle you choose.
Flexibility and Portability
401(k) plans are portable, meaning you can rollover your retirement savings into a new plan if you change jobs. This helps ensure your retirement savings may continue to grow.
Disadvantages of a 401 (k) Retirement Plan
While 401 (k) plans offer many potential benefits, here are some concerns to consider.
Limited Investment Choices
Compared to other types of retirement accounts, like an IRA, a 401(k) plan may have limited choices of investments.
The fees of a 401 (k) retirement plan may be high. This is especially true in smaller company plans.
Early Withdrawal Penalties
With a few exceptions, 401 (k) plans carry a penalty for withdrawals before 59 ½. This penalty is 10% besides to the typical income tax due on the withdrawal
Potential for Loss
When you place money into a 401 (k) retirement, you are investing. And investing carries potential risks.
Tips to Help Optimize Your 401(k) Retirement Plan
A 401 (k) has many benefits and may you supplement your retirement income. You may want to consider a strategy that aims to help grow your 401 (k) plan. Here are some tips to consider:
The power of compounding means the earlier you start saving for retirement, the more time your investments have to potentially grow. Even small contributions made early on can have a significant impact on your retirement savings.
Consider Employer Matching
If your employer offers a matching contribution to your 401(k) plan, consider contributing enough to receive the full match. This free money can help boost your retirement savings. Your Financial Advisor or Human Resources department can help you decide a matching strategy that fits your goals.
Help Reduce Your Risk
Diversification is spreading your investments across different asset classes. Diversification aims to help reduce your investment risk. By spreading your 401 (k) investments over different asset classes, the goal is to protect your retirement savings from market swings and optimize your savings for long-term growth.
Review and Adjust
Regularly review your 401(k) plan and adjust as needed. Consider increasing your contributions as your income grows. Also consider adjusting your investment allocation based on your risk tolerance and retirement goals.
In conclusion, a 401(k) plan is an important tool for nurses to help save for retirement. By taking advantage of employer matching contributions, you can gain tax advantages offered by these plans. You can also help build a solid financial foundation for your future. Starting early, diversifying investments, and regularly reviewing and adjusting your plan may help optimize your retirement savings. Remember, 401 (k) plans are investments which carry risk. Consider speaking with your Financial Advisor or Human Resources department for guidance.
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The use of asset allocation or diversification does not assure a profit or guarantee against a loss.
Georgene Collins, RICP®, RN, PhD, MBA is a registered nurse turned Financial Advisor at Airey Financial Group. Georgene helps other nurses take control of their finances and prepare for retirement. Georgene began her career with Airey Financial Group in 2017 after retiring from 30 years in healthcare.
Georgene holds the Retirement Income Certified Professional (RICP®) designation from The American College of Financial Services. She holds health and life insurance licenses and a long-term care certificate in Indiana and Illinois. Georgene is a Registered Representative and Investment Advisor Representative and has earned the FINRA Series 63 and 65 registrations.