Apart from the increased sense of responsibility and maturity in making decisions, one of the notable signs that you’ve finally become an adult is when you’re about to open up your 401(k) which can be confusing for anyone who is just learning about this retirement plan for the first time.
What is a 401(k) and how does it benefit you as an employee?
We know you’ve got a lot of questions and below are some of the important things you need to know about the 401(k).
What is a 401(k)?
Think of a 401(k) as a kind of retirement plan provided by your employer that lets you save part of your salary before taxes are deducted. Taxes will only need to be paid upon withdrawal.
With a 401(k), you have control over how money is invested. Plans usually offer a mix of mutual funds made up of money market investments and stock bonds. Below are some of the other things you need to know so you can take advantage of the benefits this plan has for you:
Invest, Invest, Invest
If you employer offers a 401(k), which they should, then waste no time to get signed up and start putting away part of your salary. Why?
Think of it this way. The sooner you start saving, the bigger the money becomes. Do you know how much difference there is if you start investing at 27 compared to investing at age 35? That can be thousands of dollars of wasted money if you don’t do it right away.
Company Match is FREE Money
Companies usually contribute or match any contribution you make (at a certain percentage) to your 401(k) and the best way to take advantage of this benefit is to maximize your whenever you can. How does it work?
Let’s say you have a salary of $50,000 and your company matches 3% of your salary which is about $1500. If you put in 3% or $1500, the company will match your contribution and put in $1500 as well. The company will only match a certain percentage so if the maximum they can match is 3%, contributing $3000 for example, will get the company to contribute $1500 still because that’s the highest they could go.
You’re literally getting twice the money you save with the company match policy so be smart and go for the maximum whenever you can. Remember, it’s FREE money!
No Matter How Tempting It Can Get, Avoid Tapping into Your 401(k)
Money is a complicated matter and there are times when we get financially challenged due to several different factors but no matter what happens, no matter how tempting it is, make sure to avoid tapping into your 401(k). Not only will you be facing penalties for such action, you will also be taking money from your retirement and lose significant returns.
To avoid this from happening, learn to save and budget your money for the rainy days. Build an emergency fund that you can tap into in case you lose your job or experience emergencies.
Don’t Cash Out Your 401(k) in Case You Change Jobs
In the event that you decide to change jobs or move to another company, you have a couple of options on how to proceed with the 401(k) you will be leaving behind. You can either leave it in your former employer’s plan, transfer it to your new company’s plan or move it to a Roth IRA but do not, under any circumstance, cash it out. You’ll just be wasting the contributions you’ve accumulated in your stay.
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