401(k) Intro_ Is Your Retirement Plan Foolish
Retirement: Introduction to 401(k)
When it comes to the issue of retirement, you are left much to your own to choose a retirement plan, to do saving and investing. Unless your standard of living allows to live on less than $13,000 a year – the average benefit Social Security provides – you’d better start thinking about saving for your retirement as soon as possible. Your employer may or may not offer you a retirement plan, but even if they do, don’t expect anyone in your office to explain what you should do with it. And this is what this article is about: to give you a few guidelines to start with. But please remember that while most of the guidelines will apply to you, you still will have to check with your HR officers about any particulars of your plan (such as employer matching arrangements or contribution limits).
A defined-contribution plan your employer provided – generally called a 401(k), but it can be 457, 403, SEP or something else – is a good place to start with. Such accounts that are coming with many tax benefits allow to sock away pretty attractive funds. In fact, 401(k) is one of the best ways to save for retirement, and it will work the better the sooner you start contributing for it. With this retirement plan there is a chance that your employer will also make contributions to it.
Participating in this type of a deferred compensation retirement savings plan employees can determine themselves the amount of their salary they wish to defer, as well as how they want to invest this money. Deferring a certain amount of salary means a smaller paycheck to be taken home. The things that makes this inconvenience worthwhile are:
•Tax deferral of all investment earning
•Tax savings on contributions
•Free money
The amount that you defer comes out of your paycheck before income taxes are applied, which basically means you pay less to Uncle Sam and keep this money out of the federal and state governments’ hands until you retire. And taxes on your investment earnings are also deferred until the time you retire.
And, at last, the best thing about contributing to a deferred compensation plan (a 401(k) or some other) is that your employer is likely to match a certain percentage of money you defer. Find out if your employer provides matching contributions and in case they do, do your best to defer every dollar you can within the amount your employer is willing to match. And in case your employer offers a dollar for dollar contribution, the amount you put away will double.
