What Actually is a 401K?
Image Courtesy of Zenefits.com
By Angela Hickey
When we think of being proper adults we think of a lot of things that tend to define adulthood such as, voting, paying taxes, and finding an enjoyable job in your preferred field. Along with all of those adult things comes a common, repeated phrase we’ve probably been hearing our whole lives, but “Just what exactly is a 401K?”
According to Investopedia.com, a 401K is defined as “a tax-advantaged, defined-contribution retirement account offered by many employers to their employees.”
So, a 401K is a company-funded retirement plan that employees can contribute to as well. With a 401K, the employee and employer can make set contributions to the account, up to dollar limits set by the International Revenue Service (IRS). These 401K plans come in various forms but can mainly be divided into two predominant types – traditional and Roth – which differ primarily in how they’re taxed.
In the traditional plan, employee contributions reduce income taxes for that year, but their withdrawals are taxed. The Roth plan, however, employees make contributions with post-tax income but can make withdrawals tax-free.
Overall, these plans, usually provided through an employer, are continuous funds being saved for an employee’s eventual retirement. Still, there are some key things you’ll need to know when trying to organize your future 401K plan.
First and foremost, you need a solid financial foundation to get yourself organized and prepared. Start by saving money in a tax-deferred retirement account as soon as you can. This way you can begin saving some of your funds before your 401K even needs to kick in. Start by saving just 1% of your pay, even if it’s all you can afford at the time. In the long run, every dollar will count, so even if it’s not a lot at first, you’ll see your numbers rise over time.
When you get a job that offers a 401K plan, save at least the amount that your employer matches, so this way you get the most out of the plan itself., It’s also important to make goals for yourself, so you should aim to put away at least 10% of your income towards your retirement each year. This way you can manage your savings better, and increase your savings rate each time you get a raise.
Finally talk to your parents, co-workers, and friends about what they’ve done to save. Establish realistic goals for yourself and try not to do things too blindly. Also, it never hurts to talk to a professional about what your options are, this way you choose the best investments and end up helping yourself in the long run.
Being an adult can be hard, and as we move on from college into the next stage of our lives, we’ll be experiencing a lot of new things that can be rather scary. Don’t let a 401K be scary. Do some extra research and talk to people you trust, and start to invest in your future.
