401(k): The Basics
Jay R. Kemmerer
Fiduciary Advisor, Author, Speaker & CEO at Berkshire Advisors, Inc.
It’s always a good idea to take care of your future self, which is why you need to plan for your retirement. It’s best to get a head start by taking advantage of the 401(k) plan offered by many employers.
If you have heard of a 401(k), but have absolutely no idea what it means or how it works, a 401(k) is a retirement savings account set up by your employers. Section 401 and subsection”k” in the IRS Code states that the government gives companies permission to set up retirement savings accounts, which also offer certain tax advantages. This is to encourage people to plan for their retirement, and it is one of the best ways to do so.
If you’re part of a 401(k) plan, a percentage of each of your paychecks will be put into your retirement savings account. The amount of money you put into your 401(k) is deducted from your taxable income, meaning you’ll reduce the amount of money you’ll have to pay in taxes for that year. You could also participate in the Roth 401(k), which means you would add to your savings account after-tax dollars. So when you retire, you can take the money out of your savings account without having to pay taxes on it.
Some companies add extra money into your 401(k) account by matching. For example, if your company matches 50% of your contributions to your 401(k) with 6% of your annual income, and you make $50,000/year, adding $3,000 to your 401(k), then your employer would add $1,500 to your savings account. Check with your company to see if they offer a match, and make sure you get the maximum amount of money available from your employer.
There are some limits to the 401(k) plan:
- You won’t have access to the savings until you reach 59.5 years old. If you need to take money out of your retirement savings accounts, you will have to pay an early withdrawal penalty and have to pay income tax. However, if you withdraw the money for medical expenses or disability. Read more about dipping into your retirement fund here.
- There are limits on how much you can contribute to your 401(k). The limits can depend on a variety of factors, such as the year or your age. Make sure to keep up to date on these limits as you go forth with your 401(k) plan.
If you’re interested in retirement savings plans, learn everything you can from your employer about what they may have to offer and don’t waste a single opportunity to provide for your future. You’ll thank yourself later!
For more, go to jaykemmerer.com