The Best 401(k)s 2023: Compare Plans

According to normal rules, as a 401(k) participant you can begin to withdraw money from your savings plan from the age of 59 1/2 years without having to pay a 10% tax penalty. However, the CARES Act allows anyone to withdraw up to $100,000 without penalty, but it's important to note that withdrawals are taxable income.

According to Vanguard, who collected data from 4.7 million participants, the average 401(k) balance according to different age groups in the U.S. is as follows:

If you are a citizen of another country but working in the U.S. on a visa, you may be considered a nonresident alien by the IRS in terms of tax purposes. As such, the IRS requires you to only pay income tax on the money you earn from a U.S. source.

This means that in terms of early 401(k) withdrawals, the rules are the same for U.S. residents and nonresident aliens. Your 401(k) withdrawal will be taxed as U.S. income whether you withdraw while you are in the U.S. or back in your home country.

An option is to roll the funds over to an IRA, or leave the funds where they are until you are 59 1/2 years old so that you can start making tax-free withdrawals from the fund.

When you leave your job because of termination or retirement, you can leave your 401(k) with the original sponsor, roll it over to an IRA, distribute it as a lump sum cash payment, or transfer it to your new employer's 401(k) plan.

Each option has its advantages and disadvantages. Not all employers will accept a rollover from another 401(k), although this is a simple way of managing funds in one place. A disadvantage would be that the plan may be run differently and you won't have any say in how assets are allocated.

While most retirement savings plans are designed to safeguard you against losses, it's not entirely impossible to lose money with a 401(k) plan. A 401(k) loss can happen when:

• You cash out during a downturn
• Can't pay back a 401(k) loan
• Are very invested in company stock
• Leave your job before you own the company match

One of the biggest drawbacks of having a 401(k) plan is the fees, limited investment options, and the fact that you can't always withdraw money when you want to. You may also have less control over your taxes.

This part is usually up to you; mutual funds are typically a good choice but you should choose wisely. Long-term savings goals like retirement plans typically opt for stocks, as they usually offer returns that can outpace inflation. You can also add some cash or bonds to the mix to expand your portfolio. You can use a retirement planner to help determine the best investment choices to make. 

According to most experts, your retirement income should be equal to around 80% of your last pre-retirement salary. As an example, if you earn $100,000 a year by the time you want to retire, you need at least $80,000 per year to have a comfortable lifestyle during retirement. 

When it comes to saving for retirement, starting early has its benefits. For example, if you start saving $5,000 a year between the ages of 30 and 40 and then stop saving altogether, you will have a larger balance by the time you retire than person B who saved the same amount every year between the ages of 30 to 60.

Even though person B saved for a longer period, you'll have a larger balance due to compounded earnings.

A good example is someone earning $50,000 a year, who starts with a zero 401(k) savings plan. By saving 8% of their salary and getting a contribution of 3% from their employer, along with a 2% annual salary increase, this can easily amount to more than $250,000 in savings in a 20-year timeframe. 

In the same scenario, but starting with a $5,000 balance instead of a zero balance, this total can grow to more than $280,000 during the same 20-year period. 

Note: In 2021 you can put as much as $19,500 into your 401(k) retirement account for the year and if you are older than 50 years, you can add another $6,500.