Are you ready for retirement? While many people are dreaming of what retirement life looks like, most people are not financially prepared. While I’m not sure what other countries have; in the United States, some companies offer 401K plans to help plan financially with a retirement savings plan.
One of the things I like is that this is automatically taken out of my check based on what I signed up for. It puts the retirement savings on autopilot. By starting sooner versus later, the compounding interest benefits are available for a longer time.
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What is a 401K?
The United States Internal Revenue Service (IRS) defines a “401(k) Plan is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan.”
It is a retirement savings plan that employers offer as benefits for their workers. There can be various options that can be offered as mentioned in the IRS definition. It is important to check the particular details with your employer’s Human Resources.
Items that determine how much is available when you retire
Amount invested How it is invested Fees associated When you started invested
Contributions by the employee are 100% the employees. Some employers match a certain portion or percentage of what the employee puts in which is an extra benefit and “free money”. The company matching funds are not 100% the employees until they are fully vested. Vested refers to the amount of the matching funds from the company that the employer can take when the employee leaves the company. There is typically a vesting period of years where the employer defines what percentage is vested until it is 100% fully vested.
There are maximum employee contributions into this plan that can vary from year to year. For the last few years the max has stayed the same and for 2017 it is $18,000 per year. If you are 50 years or older, there are different limits, so check with Human Resources and the IRS guidelines.
When to Start
The earlier you start the better due to compounding interest and the value of time. With compounding interest, the interest that is earned is reinvested instead of paid out. The earlier you start investing, the more compounded interest in invested.
The money contributed is invested in your choice of options available in your particular plan. These generally include mutual funds, stocks, and bonds. These can be decided by the employee based on the amount of risk they want to take. As you get closer to retirement, your investment needs will change. There are multiple scenarios and risk associated.
There are fees associated with the 401K plans that will be deducted from your investments. These are the costs that it takes to keep track of the monies in the plan. It is associated with managing the investments and various other items.
While the IRS definition states the contributions can be after taxes, many of the plans are tax-deferred. Tax-deferred means that when the monies are taken out of the 401k, taxes will be due.
Withdrawal of Monies
There are restrictions on when and how monies can be taken out. Withdrawal penalty fees are applicable as well as the taxes due if taken out prior to retirement age.
Retirement will be here before you know it, so check to see if your employer has a 401K. The sooner you can start investing in one, the more compounded interest will be earned. Sometimes employers have will match a certain portion. If you are able to invest, consider putting in enough to get that free money. Look at the vesting schedule to see when the employer’s contributions will be yours. Your contribution should be pre taxed and will be yours. As you dream about the things you want to do on the bucket list when you retire, remember to start planning now for it.