In 300 Words or Less: What is a 401(k)?

How Do I Get a 401(k)?

No doubt you’ve heard folks talk about a 401(k) plan. Additionally, they’ve probably mentioned how you ought to be putting money into one for retirement. However, it can be hard to sock money away when finances are tight. Moreover, if you’re not sure about the benefits of a 401(k) plan, then you’re certainly less inclined to work toward contributing to one. Today we’re going to go over the basics of a 401(k) plan, and give you all the ins and outs!

What is it? A 401(k) plan is a pre-tax savings plan that may be provided by your employer.  You – and in many cases, your employer – contribute to your account automatically each pay period. In order to draw/retain quality employees, many employers will “match you,” meaning that when you contribute, they contribute also, up to a certain percentage. Often this “match” ranges from 50 cents on the dollar to dollar-for-dollar matching up to a certain percentage of your income. Note that sometimes your employer’s contributions may have to “vest”, meaning you only get to keep them if you stay with your employer for a specified period of time (often 3-5 years).

Who can open one? Provided your employer offers a 401(k) plan, anyone can contribute to a 401(k) account – and the earlier the better. The more money you deposit, the more you’ve got set aside for your retirement, and the more opportunity you have to earn a great return on your investments. Reduce your future stress by thinking ahead!

Why should I open one? Contributions to a 401(k) plan are made pre-tax, which means that you can reduce your taxable income, and you contribute more money with less sacrifice than setting it aside after taxes are taken out. Additionally, by investing your money while it is in your 401(k), you stand to not only save money, but also add to that money with your investment returns.

How do I get started? The first step is to speak with your employer’s benefits manager, and determine what kind of pre-tax or 401(k) package is available.

Note:  Many financial advisors recommend saving a “cushion” of 6 months of living expenses in an easily accessible form such as a savings account prior to contributing to a 401(k).

By |2018-03-07T21:25:43+00:00February 16th, 2016|General Finance|0 Comments

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