When you hear the words 401(k), your mind might automatically jump to the idea of retirement. However, not many people know what a 401(k) really is, how it works, or how much you should contribute to it to ensure you’re receiving the maximum amount of benefits. Today, we’re breaking down the process to help you plan for your future.
What is a 401(k)?
A 401(k) is an investing and retirement savings plan that is typically offered by your employer. The reason the plan is so attractive for many people is that as an employee, you’re not taxed on the money that you contribute. Instead, these contributions are taken from the paycheck of the employee and put into a specific offering, which is also chosen by the employee. This helps to create a sizable nest egg for you to sustain yourself throughout your life.
The reason this plan is referred to as a 401(k) has everything to do with the specific section of the tax code that initially established the plan. When you sign up for a 401(k), you’ll get to choose the specific dollar amount that gets pulled from your paycheck and contributed into the 401(k) account. You’ll either receive the benefits from the tax break when you withdraw it during retirement or when you initially contribute money, depending on the type of plan you have.
Why should I contribute to my 401(k)?
Contributing to your 401(k) is helping you set yourself up for your financial comfort during retirement. You don’t want to have to work forever, and contributing to a retirement plan helps to ensure that you can enjoy your older years. Plus, you end up saving a ton of money if your employer is part of a matching program, and your money won’t be taxed.
401(k) tax contribution benefits
One of the most attractive parts of a 401(k) plan is the tax benefits. None of your contributions are taxed, so you won’t have to pay any money until you retire and withdraw it no earlier than59.5 years old. Additionally, you’ll be put in a lower tax bracket because your contributions are not counted as income, which ultimately results in a smaller tax bill.
Lastly, the amount of money you earn in the plan is not taxed if it stays within the original plan. This allows your earnings to compound, making you even more money.
Determining when to start 401(k) contributions
If you’re working a job, you should already be setting a portion of your income aside for your retirement. The general rule of thumb is to put between 10% and 15% of your income towards your retirement.
Depending on your employer’s program, they might already match a certain percentage of what you put into your 401(k), which is usually between 3% and 5% of your contribution. You’ll want to at least put in this amount because you’re essentially getting free money.
The most ideal situation is to max out your Roth IRA to take full advantage of this opportunity. However, the amount of money that you ultimately choose to contribute will depend on the circumstances of your personal life. You’ll want to consider your other financial goals when choosing a percentage, such as other debt payments that you owe or your personal savings goals.
Begin your retirement plan today
If you’re ready to get started and establish your 401(k) plan today, you’ll need to follow these tips to ensure you’re making the most of your future retirement money.
Choose your budget
To make intelligent decisions about your finances, you’ll need to first determine how much you plan to contribute to your 401(k) from each paycheck. The earlier you start, the more comfortable your retirement will be for you.
As previously mentioned, consider saving between 10% and 15% of your wages as soon as possible. Think about your money goals and your life situation to ensure that the amount you choose to deposit into your 401(k) still leaves you with enough money to enjoy your life in the present.
Contribute your employer’s match
An employer 401k match is one of the biggest reasons most will agree to a 401(k) plan. Look into what that looks like for your company to ensure you’re always maxing out your contributions.
Consider the specific terms
When you sign up for a 401(k) plan, you’ll usually automatically be paired with a default investment plan that is based on a target date of retirement. However, this default investment amount may not be what’s best for your retirement goals. Take the time to learn about the plans, any fees imposed, and the way the money is allocated so that you’re always in control of your paycheck.
Negotiate a better salary
When you’re earning more money, it’s easier to put more money towards your retirement. Consider asking for a better salary or raise from your employer. Not sure how to increase your income? Check out our guide on how to negotiate a better salary.
Hire professional help
Finding the right financial expert to help you with your retirement plans and savings will help you make the most of your money. They are legally bound to act in your best interests and find the best solutions depending on your personal situation.
Start your savings now for a better tomorrow
If you’re not taking advantage of a 401(k) account, you’re missing out on money for your retirement, especially if your employer offers a matching plan at work. It’s essential to take the time to understand the 401(k) plan available to you as well as the contribution benefits so that you can and start taking the necessary steps to build a retirement that is realistic for you.
We know that using a financial professional is not always an affordable option for everyone. But with MoneyLion’s investment account, you’re able to have complete control over your retirement plan without paying a ton of money. You get to choose how your money is invested instead of having to take the one-solution-fits-all route that most other companies offer. Start today by signing up for an account to reach your retirement goals!