Everything You Need To Know To Save With A 401(k) Plan
Saving for retirement is difficult so many employers have provided retirement plans to their employees, with the most popular being the 401(k) plan. A 401(k) plan is a defined-contribution plan, where you make regular contributions into an account that you own and make all of the investment decisions for. 401(k) plans allow people to finance their own retirement and have sole authority over the decisions that will affect their future.
Employer-sponsored 401(k) plans are one of the best places to save for retirement because many employers match your contribution up to a certain amount, giving employees a guaranteed return on their money. There is also numerous tax benefits associated with these plans, including allowing employees to make their contributions on money that has not yet been taxed, reducing their taxable ie by the amount contributed.
Saving in a 401(k) plan is simple. You decide the amount to contribute, typically 3%-10% of your salary, and the amount to contribute is automatically deducted from your paycheck each pay period. Contributions are held in your account and are invested in mutual funds chosen for the plan by thepany. Mostpanies will have a wide selection of different mutual funds to choose from reflecting differing levels of risk and the employee picks which mutual fund to invest the money in their 401(k) account in.
The maximum contribution to a 401(k) plan is $16,500 annually. Individuals that are 50 or older can contribute an additional $5,500 to their 401(k) plan as a “catch-up contribution.” The money in your 401(k) account will grow tax-free, but tax penalties will be charged on all withdrawals from the account made before you reach the age of 59 ½. This penalty fee is generally 10% on top of ordinary ie taxes on the money withdrawn. To avoid the penalties, the money in your 401(k) account should be left alone until you retire.
Retirement plans differ frompany topany, but most medium-sized and largepanies offer 401(k) plans. Certain employees of public schools, hospitals, and certain tax-exempt organizations offer their employees 403(b) plans and government employees are offered 457 plans, both of which are very similar to 401(k) plans. Mostpanies have phased out their pension plans due the high costs of the plans, so most people need to think about financing their own retirement.