The 401K is perfect for people who want to build up a retirement fund. However, it seems like such a technical term. What does it mean? K generally stands for thousand, so does it mean you build up $401,000 between now and retirement? Because that would sound very interesting indeed. Unfortunately, that isn’t actually what a 401K is. However, it is still a very good retirement investment option, so long as you know what you are doing.
Understanding the Basics
The first thing you have to is understand the basic of the 401K.
Your retirement future is up to you. Use this checklist to ensure you are on track. One of the distinguishing characteristics of a 401(k) retirement plan is how much employee involvement there is, particularly at the start.
This means that you are the one that gets to decide how much of your monthly earnings you want to contribute. You also get to decide how your money is invested. This, in turn, means that it is your decision as to whether or not you change your investment selections. Lastly, you decide how any proceeds you make get paid out to you.
There are four things in particular that play an important role in the 401K. These are the tax-deferred contributions, the tax-deferred growth, your individual choices and your employer’s support.
Tax Benefits of the 401K
One of the greatest things about the 401K is that it gives you amazing tax benefits.
Every payday, your company will automatically deduct a pre-determined amount from your paycheck to buy investments in your 401(k) retirement account. The money you invest in that account won’t be taxed until you actually withdraw the money when you retire. This is called a pretax contribution.
This sounds quite complicated, but it isn’t really. Let’s say you earn $50,000 per year and you decide to put $5,000 a year of that into your 401K. This means that you will only be taxed on a yearly salary of $45,000. Yes, you will earn less a month but because you will also pay less tax, this difference is actually quite small. The money you put away will grow free from tax for the duration of your savings account. When you come to the point of wanting to access your money, you will be taxed, but since this is so many years in the future, it means that you will have quite a nice sum of money to spend.
One reason as to why the 401K is so popular is because of the fact that you don’t have to pay taxes over the money that you save while you are saving it. The other benefit, however, is that there are many companies that offer “matching”. This means that they will match a percentage of what you put into your 401K, making your retirment savings grow even faster.
Your company might offer a 401(k) match. For example, a 1:1 match up to $2,000 means that your company will match every dollar you invest up to $2,000; therefore, investing $2,000/year really means you’re investing $4,000/year. Woah. This is free money and you absolutely, positively need to participate if your employer offers a 401(k) match. It doesn’t matter what kind of debt or expenses or whatever you have-if your company offers a match, do it.
Taking part in a retirement fund is incredibly important. You may feel like the future is still far away, but the longer you wait, the less you will have. The 401K is a fantastic opportunity to live comfortably when you are older.