Contributing to your employer’s 401(k) plan is a useful tool to save money for your retirement. Take the next steps in learning about the options you have with your plan in order to reach your goals.
The company that offers the 401(k) plan will give you options for how you can invest the money that you put into the account. There are usually a variety of funds to choose from based on your needs and how conservative of an investor you are. It’s important to know what you are investing in, and why it may be right for you.
Some employers offer matching funds for employees who contribute to the company’s 401(k) plan. If your employer is offering a matching program, the smart choice would be to take advantage of it because this is additional money they are willing to give you. They are essentially giving you a bonus by investing in your future! Matches are typically a percentage match of your contribution up to a certain amount. For example, your employer may match 100% of your contribution up to 3% of your total compensation. This means if you make $60,000 and you contribute 3% or more of your salary to your plan, your employer will put in an ADDITIONAL 3% ($1,800) into your retirement plan for you. This is a wonderful benefit that helps you save even more for retirement.
401(k) contributions are excluded from your taxable income unless you are contributing to a Roth account. This means your taxes on the money you contributed into your plan are deferred until retirement, giving you more income to invest and grow now. For example, if you contribute $5,000 to your retirement plan and your salary is $60,000 a year, you will only be taxed on $55,000.
You should also be aware that generally you are going to incur taxes AND additional taxes if you take money out of your 401(k) plan prior to reaching age 59 ½ and you haven’t experienced a ‘financial hardship’ that meets the distribution rules. Most retirement plan distributions are subject to income tax and may be subject to an additional 10% tax. If you are planning on taking a distribution, check to see if you are going to incur taxes and/or penalties beforehand. Read more at the IRS website.
Your employer-sponsored plan is just one part of your financial picture. A financial plan can help you gain clarity on the big picture of how your savings, budget, investments, retirement plan, and insurance needs can all work together towards your ideal future. A financial plan not only helps you analyze your situation, it also lays out an actionable plan of how you can work towards your goals.