If you work or if you are looking for a job, you’ve probably heard people talk about 401(k) a lot. This is because most employers offer this plan as a retirement benefit. Here’s all you need to know about 401(k) and how it works.
A 401(k) is a retirement plan, sponsored by an employer, that lets workers save and invest a part of their paychecks before taxation. You will pay taxes once the money is withdrawn. 401(k) became popular in the 80s as pension funds became more and more costly.
With a 401(k) plan, you can control the way your money is invested, as most plans offer a variety of mutual funds composed of stocks, bonds and money market investments. The most popular option is a target-date mutual fund.
One thing to keep in mind about a 401(k) plan is that it has complex rules for withdrawing your money and penalties for taking your funds out before retirement age. Think of it as a two-way road: it is an investment for your future, but it is also an insurance against employees leaving too early. So you get something and your employer gets something.
Your employer will hire an administrator to oversee your account. They will keep you up to date with all the information regarding your plan and its performance, so if you have any questions, you should contact the administrator.
You need to determine how much you put it. To decide how much of your paycheck you put in your retirement fund, you need to calculate your monthly expenses so you don’t struggle to make payments today. Once you have that sorted, destine as much as you can to your 401(k) plan.
Try to get as close as you can to match your employer’s contribution. According to the Plan Sponsor Council of America, the average is 3% of your salary. Always remember this is investing in your future.
Most companies will let you enroll in a 401(k) plan right away, but some employers will enroll you only after a year. If that is the case, set up an individual retirement account. You can increase or decrease your contributions at any time.
If you change employers or stop working at a company, you can roll your money over into a traditional IRA, so you don’t pay the 10% penalty for withdrawing your money before you retire.