As you begin to think about – or maybe you have already been thinking about – your retirement planning, a 401(k) plan is a great option to begin saving for the days you won’t be working anymore. A 401(k) is a savings plan that is sponsored by an employer where you are able to set aside money out of your paycheck to go towards a retirement account.
More often than not, your company will offer some sort of match into that account based on what you put in. Some employers do a full match of your funds up to a certain percentage of your earnings while others do a half match of your funds up to a certain percentage of your earnings. The IRS regulates 401(k)s so there are limits to what you can contribute to the plan every year.
Planning For Retirement With Your 401(k)
The first step in retirement planning is to start as early in your career as possible. The funds in a 401(k) account compound over time so the earlier you start, the more that will be in your 401(k) account upon retirement.
Another important piece in retirement planning in a 401(k) is to try and maximize the amount that your company matches into your 401(k). Let’s say, for example, that your employer does a full match of your funds up to 4% of your earning. If you are only contributing 2% of your salary, you are missing out on free money contributed by your company.
Finally, when planning for retirement, it is important to contribute as much as you can into the account. You’ll need to factor in and budget for what you – and any dependents – need to live on. Remember that the more you can contribute now will lead to a larger fund at retirement.
401(k) Investment Options
Most plans have distinct portfolios of mutual funds where you can invest your dollars. These can include stocks, bonds and money markets. Some plans decide where your funds go based on a target retirement date. If you are younger in age, your funds go to more high-risk funds with more potential for growth. On the other hand, if you are older in age, your funds go to more low-risk funds where the growth and loss potential are minimal. You can also move the funds where you want if you know a financial adviser or know the markets well. You have the ability to continuously do this with your retirement fund.
Traditional and Roth 401(k) Plans
When opting into your 401(k) for retirement planning, you’ll have the option to choose a traditional or a Roth option. Following are details on each:
• Dollars come out of pay pre-tax
• Save you on taxable income at the end of the year
• Money is taxed as you withdraw upon retirement
• After-tax dollars come out of your pay
• Shows as taxable income every year
• Funds are not taxed upon withdrawal at retirement