Let’s face it: No one stays young forever. That said, the time to start investing in your financial future is now; after all, you probably don’t want to be working when you’re in your 70s. Planning for your retirement and how you are going to fund your Golden Years is something you should start thinking about as soon as you start working, and for many people, this plan consists of a 401(k).
A 401(k) is an employer-sponsored retirement savings plan. Also known as a defined contribution plan, you put a certain amount of money that is withdrawn from your paycheck into a retirement plan. The money that is deducted from your paycheck is done so before taxes are taken out, which actually helps to lower your taxable income. That, of course, helps to lower the taxes you have to pay on your income. You aren’t taxed on the money put into your 401(k) until you withdraw it. These retirement plans are offered to employees who work for private or public for-profit organizations.
Some employers also opt to match the amount of money you put into your 401(k). This certainly sweetens the pot, as it allows you to acquire even more savings for your retirement. Companies that choose to add contributions to a 401(k) program do so for incentive purposes; it helps to attract quality workers and encourages longevity in the workplace.
In order to take advantage of a 401(k), you’ll likely have to meet some type of eligibility requirement. Those requirements are usually set forth by your employer. For example, you may have to wait a specified period of time before you are able to start investing money into the program.
If your company makes contributions to your 401(k) program, you may be required to wait a period of time before they start making those contributions. This makes sense, as it helps to encourage longevity and decrease a high turnover rate in the workplace. Think of it as a company’s investment in their workers.
There is a maximum amount set forth by the IRS that you can contribute into your 401(k) plan. This limits the amount you can invest into your 401(k) each year, and typically, it’s adjusted to a higher amount annually to take into account the cost of inflation.
If you are over the age of 50, you are eligible to make what is known as “catch-up” contributions to your 401(k). This allows you to put more than the maximum amount into your 401(k) plan. If you are over 50, you may want to take advantage of this so you can have more money put away toward your retirement, which will be approaching sooner than it would be if you were 30 years old.
It certainly isn’t required by law, but employers do have the option to add to their employees’ 401(k) plans. The amount that employers choose to contribute varies, but it typically ranges from 25 percent to 100 percent of the contributions employees invest. Some companies even raise the amount they will contribute; the longer you are with a company, the more the company will invest.
If you change your employer, you do have several options available for what you can do with the balance you have accrued in your 401(k) with your previous employer. You can either roll it over into a plan at your new place of employment, withdraw the account balance for a cash lump sum, or roll it over to an IRA (Individual Retirement Account).
A 401(k) is a great investment toward your future. If your company offers one, it is highly advisable to take advantage of it.
Bridget Galbreath is a writer who is well-versed in a wide range of topics, including money management and philanthropist Steve Wynn.