Today most employers offer a 401k to their employees. It is one of the easiest and most convenient ways to save for retirement. Most times you just fill in the amount or percentage you want to save in the 401k. Once your determine how much you want to invest, you then pick which mutual funds you want to have your money invested into.
Yes, that is simplistic answer, but saving for retirement does not have to be difficult.
The advantage of a 401k is that most offer an employer match. An employer match is the amount the employer will contribute to your 401k account as long as you do some percentage. An average 401k usually has a 3% match. So if you contribute 3% of your annual paycheck to the 401k, your employer will match that same 3%. It is like receiving a 3% pay raise from your employer. If you don't do anything, you don't receive anything. Now if you do at least 3%, your employer will match that same 3%.
There are some other matching percentages i.e. is that if you do 3% they will match 50% or 1.5% of that amount. The two phrases for a match is a dollar-for-dollar or a percentage match like 25% or 50% of what the employee contributes.
The employer match is one of the great benefits of a 401k. Another benefit is tax-deferred earnings on your investments. In a 401k you do not pay any taxes on the growth of your investments as long as the money stays in the 401k. Once you leave that employer you have several options. One is to rollover the money in the 401k into your own IRA or into another 401k such as one at your new employer. The second option you have is to take distribution or receive a check that you deposit into your bank account. Once you do that you have 60 days to deposit that money into another IRA. If you do not do deposit the money into another IRA the IRS will charge you a 10% penalty plus that amount will be fully taxable.
For example suppose you had $10,000 in your 401k and you decided to have them send you a check so you could pay off some bills. When you file your taxes the IRS treats that money as if you earned an additional $10,000 that year. So depending on your tax bracket that could cost you 30% to 40% or $3,000 to $4,000 of additional taxes. You think that is not very much because you at least eliminated that credit card bill. However, if you were only 35 years old at the time and did not plan to retire until age 65 that $10,000 could have increased in value to $147,300. So that little mistake cost you over $147,000 on one small investment of $10,000.
For many people this is basic knowledge, but many don't realize the same mistakes they make can compound into large mistakes down the road.
Hope you enjoy this information. Until later keep on saving for retirement.
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