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Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance. She has mastered the art of boiling down complicated financial topics for readers to understand. |
When it comes to retirement savings, it doesn't get any simpler than a 401(k). The 411 on 401(k) Plans By Britt Erica Tunick If your company offers a 401(k) plan and you aren’t investing in it you might as well just toss some money into the trash especially if your employer matches any portion of your contributions. When it comes to retirement savings, it doesn’t get any simpler than a 401(k). That’s because the plans allow an individual to determine what portion of their income they would like to set aside for retirement and remove that money from their salary before they are ever paid eliminating the possibility that you’ll stray from your plan to save for retirement and wind up spending that money on something else before it is invested. And on top of that, they include the bonus of a tax break. Depending on the type of 401(k) you choose, or which your company offers, you can either invest on a pre-tax basis (a traditional 401k), which produces the benefit of lower annual income tax; or you can invest money that has already been taxed (a Roth 401k), which means that you will have the benefit of accessing that money on a tax-free basis when you finally do retire. If you invest in a traditional 401(k), your money will remain tax-free until the time you retire, or when you hit age 59½ whichever occurs first. Like all retirement investments, 401(k) plans benefit not only from ongoing investments into them, but also from the power of compounded growth through the earnings and interests generated by your individual investment portfolio. Unlike traditional investments, however, you will not be taxed annually for portfolio gains. And since many companies will match a percentage of an employee’s contributions to encourage savings, typically in the area of about 6% of what an employee contributes on their own, that’s just icing on the cake. Just know that if your company does match your contribution you’ll want to read the fine print, as many companies will not consider matching contributions to be vested until an employee has remained with them for a pre-determined number of years, typically three to four years. So if you quit or get fired before you are vested, you’re likely to forfeit any matching contributions made by your employer. If you want to make sure to maximize your 401 (k) savings, and you can afford to do so you should contribute the maximum you are legally allowed to in any given year. For 2017, the maximum you can contribute to a 401(k) is $18,000, with the possibility for an additional $36,000 in matching and profit-sharing contributions from an employer for a total of $54,000. In 2018, the IRS has raised the maximum contribution to $18,500, with employer matching and profit-sharing contributions rising $500 as well, for a combined possible total of $55,000. Anyone age 50 or older has the ability to make what is known as a catch-up contribution of an additional $6,000 as well. |
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