Lots of people are increasingly on their own when it comes to planning for their retirement years. Outside of the public sector and heavily unionized industries, today’s typical pension plans are nearly non-existent. The 401(k) plan’s major replacement, the pension plan, entrusts individuals with a growing responsibility (and risk). The 401(k) plan, by comparison, places the bulk of the responsibility for managing your retirement savings on you. Your employer, in other words, assumes the little risk. In exchange, you assume the bulk of the responsibility.
What is a 401(k) Plan and How Does it Work?
401(k) plans work like this: your employer makes a small contribution to your 401(k). You, however, make a larger contribution. These contributions are made through “your account” at a financial institution, such as a bank or investment firm. Choose to invest your money in various securities (stocks and bonds), mutual funds, or other investment vehicles. When you cash out (take your money), you can choose to take it all, some, or nothing. Keep in mind that the more you invest in a 401(k) plan, the more you can take home.
How Do You Get a 401(k)?
Your company might offer you a 401(k) plan if you’re employed. If not, you might want to consider setting one up yourself. Generally, the process is quite simple.
- Talk to your employer, and find out more about the available plans and your options for signing up.
- You typically have to be at least 21 years old to participate.
- An employee and an employer contribute a certain percentage of your salary.
- The contributions to your 401(k) are made through “your account” at a financial institution.
- You can decide how large a portion of your salary to invest.
Why Open a 401(k) Account?
- Decide How Much to Contribute
The most important figure in deciding how much to contribute to your 401(k) is your age. You’ll probably want to contribute more as you get closer to retirement. The contribution limits (the maximum) are as follows :
* If you are 50 or younger when you start your job, you can contribute a certain percentage of your salary (generally up to $17,000).
* If you are older than 50 when you start your job, you can contribute a certain percentage of your salary (generally up to $22,000).
- Consider Your Investment Options
Your 401(k) is an investment vehicle, like stocks or bonds, and it’s not a savings account. When you invest in a 401(k) account, you invest in a future retirement income stream. Get a 401(k) Match Most (if not all) employers will give you something extra, called a 401(k) match.
This is an increase in the amount that you put into the plan. The employer match is a percentage of your total investment, and the match is typically a few percentage points more than the contribution limit. For example, your employer might offer a two percent 401(k) match to your investment.
Consider a Roth 401(k) A Roth 401(k) plan is one in which you pay no tax now in exchange for tax freedom later. With a Roth, you contribute after-tax dollars, and then, when you take your money out in retirement, you pay tax-free. Keep 401(k) Costs Low The best way to ensure a low cost of investing in a 401(k) is to diversify. Diversification ensures that you don’t put all your money in one stock. If you do this, you drastically reduce your chances of making any sizable investment. By diversifying, you have a better chance of making substantial gains without incurring any substantial losses.
How to Maintain Your 401(k)
Invest the contributions you make to your 401(k) The contributions you make to your 401(k) are only made once per month. You need to take your money out at least once per year. (You can withdraw your investment without a tax penalty if you do not meet this minimum. ) You don’t have to take out a penny, even once you hit retirement. It might make sense to keep some of your investments in your 401(k) until you die. Make regular investment contributions Regular contributions are made throughout the year.
Your 401(k) might automatically contribute a certain percentage of your paycheck, or you might have to contribute a certain dollar amount. Make sure you know when’s the best time to contribute. For example, if you get a raise in December, you’ll want to contribute more in December than you would have if you got a raise in July. Also, your employer might have a matching program. If your employer contributes to your 401(k), you’ll want to contribute more. The employer contribution might be the maximum that your employer will match.
Be Smart with Your 401(k)
Max out your contributions Maxing out your contributions means that you put as much as you are allowed into your 401(k). Doing so will give you the maximum tax deduction and flexibility with your money in the account. Maxing out your contributions is not always the best financial move. For example, if you have a relatively low income and a relatively large 401(k), contributing the maximum might not be the best use of your money. In that case, consider contributing less. You need also consider your retirement income needs before maxing out your contributions.
Invest for the long-term 401(k) plans are designed to last you during your retirement. You don’t have to invest in your 401(k) as if you were going to the mall on Black Friday, but you should be sure to contribute the maximum you are allowed. You might even consider leaving some money on the table to invest more long-term.
Final Thought – How To Get 401k
Getting 401(k) is easy. You need an employer that offers 401(k) and you need to save. You don’t necessarily need to become a financial guru to get started with a 401(k). The very best way to learn is to do. So if you don’t already have a 401(k), start investing in your 401(k) right away. You need to decide how much to contribute. Remember that the more you put in, the more you can take out. Your contributions will be invested and the money you don’t touch will be invested for you.