What Is A 401K? Let Us Break It Down For You
/ / What Is A 401K? Let Us Break It Down For You

What Is A 401K? Let Us Break It Down For You

What You Need To Know About A 401K

Has your job asked you about signing up for a 401(k) account and you’re not sure what to do? Don’t worry we have all the information you need so you can make a wise investment. Hopefully your company will match the 401(k) so you’ll receive even more money, but we’ll get more into that later…so let’s get started.

401(k) Basics

Your company is asking you to sign up for a 401(k) which is a savings and retirement tool that a lot of companies let their employees tap into. You can let a set amount of money be transferred from your pay check each pay cycle into your 401(k), which serves as a long term retirement savings. Just keep in mind, this isn’t short term savings to tap into if you buy drinks for the whole office and your card is declined. This is a long term investment, so try not to touch it because you’ll be taxed if you do.

Do I Need A 401(k)?

A lot of people ask this question because depending on your age, you might need that extra income that would normally go into a 401(k) account. If you’re in your 20’s for example, you might not be thinking about retirement savings, but it’s also a great time to start saving that nest egg for your retirement. Check out a book by David Kiyosaki, Rich Dad, Poor Dad about investing advice and how you can retire as a millionaire by saving early.

Tips About Investing

What You Need To Know About A 401K

If your company says they will ‘match’ your investment, definitely sign up for this. It means that if you invest $3,000 every year, they will give $3,000 towards your retirement. That’s a free $3,000. You still don’t want to touch it because of the tax penalties, but its extra money that a lot of companies won’t give. Ask what the maximum is that they will contribute and try to set your savings goals to this same amount, then divide it by the number of pay cycles you have.

What’s Invested With The Money?

Now this is where it can get a little tricky if you’re not an investor and you don’t understand stocks, aside from knowing you should have bought Facebook a few years ago. With a 401(k), your money is going to be distributed over a set number of accounts that it’s going to be invested in. These can include mutual funds, stocks, bonds, and other types of accounts. When you set up your 401(k) with your company, they may direct you to the company they use, so it might be T. Rowe Price or Fidelity. After they give you the website and you sign up for the account, you will set up your user name and password. Then you can make your investments. They consider this allocating your money or deciding who gets a piece of your pie. This is where if you don’t have knowledge about investing you can just call the (800) number and ask for someone in customer service to direct you. Sometimes people ask their coworkers, but the problem with this is while they might tell you what they invest in, do they really know themselves? Also factor in if the market makes a turn for the worse, you may not know what changes to make and you can’t assume that they’re going to tell you every investment they have or changes you should make. A lot of people don’t want to get involved in other people’s money, unless your name is Bernie Madoff.

What If I Need To Take The Money Out Or I Leave My Job?

If you run into a life changing emergency like a big illness, you can take money out of your 401(k), but there are huge tax penalties and depending on the state that you live in, there’s a certain percentage you will have to pay the IRS the next time you file your taxes. That’s why you want to keep the money in long term for as long as you can. There are people who, after a few years take out a loan against their 401(k) if they want to put a down payment on a house, and in essence, this is a loan that will be repaid back into their 401(k) account, but you should only do this if you plan on staying with your job long term. You can’t take out a loan and then quit because you will still have to pay the money back and pay taxes on it.

If you leave your job, whether you quit or are fired and even if your company closes, your 401(k) account is transferred to an IRA, or an individual retirement account. You may have to speak to the company where your 401(k) was established or you can go online and decide whether you want the money to go into a traditional IRA or a Roth IRA. To understand the benefits of these you can check out, David Bach’s book, Finish Rich which can give you tips and pointers depending on your retirement goals.

The main goal is to utilize the employee matching, try to save as much as you can and learn about your retirement savings. Who knows? You might have so much saved for retirement in a few years that you can retire early!

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