The 411 on 401(k)s
The best gift you can give yourself in retirement is to start planning for it early on. Being informed of your options for retirement savings means you can make informed decisions to prepare for the future. Here’s what you need to know about 401(k)s to begin planning for your future.
What are they?
A 401(k), or 403(b) for those working in non-profits, is an employer-offered investment account. When you opt-in to your 401(k), a percentage of your paycheck will be directly deposited into the account. Many employers offer 401(k) matching, where they’ll match up to a certain percentage of the amount you’ve deposited in order to encourage retirement savings. For example, an employer may match 6%, so if you deposit $100 into your 401(k) from your paycheck, that employer will deposit $6.
There are two kinds of 401(k)s, traditional and Roth. In a traditional account, your deposits are based on pre-tax deposits, and the withdrawals will be taxed. The reverse is true for a Roth 401(k), where you’ll pay taxes on your deposits upfront, but you won’t need to pay the taxes when you withdraw your savings. Not every employer offers a Roth 401(k) option.
What happens to the deposits?
The way your account makes money is through investments. You’ll have the opportunity to choose where your money is invested based on what your employer offers, typically this will be an assortment of stocks or mutual funds.
You do have a limit on how much you can deposit in a year, currently $61,000 for those under 50 years of age, or $67,500 for those older. Withdrawals often referred to as “distributions,” are required after a certain age. This means that after 72, you’ll be required to take a certain amount out of your 401(k) every year.
How can I withdraw?
401(k)s are great retirement accounts but should not be used for emergency savings. They often are difficult to withdraw from if you’re below retirement age. If withdrawn early, you’ll be charged a percentage as a penalty. Some employers may offer you a loan against your 401(k), or essentially take out a loan against yourself. In this case, if you leave the job before the loan is repaid, you may be charged a penalty if you don’t pay the loan back in full.
Why should I start now?
The best time to start preparing for the future is today! While retirement may seem far off for someone in their 20s, 30s, or even 40s, the work you put in today will pay off and compound over time. If you want to retire worry-free, talk to a financial advisor about how to start saving for retirement.
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