A 401k is a great starting point in getting yourself ready for your potential retirement living, irrespective of how distant you are from retirement age. Our most frequently asked question is precisely, “what is a 401k?” A 401k plan can be a distinctive savings account that is directly backed by your paycheck every pay period. You and your employer decide the amount of money that may be deducted from each paycheck you earn, then the employer establishes your pre-tax earnings and deducts your 401k resources from your paycheck before taxes. After your funds are deposited in the specific bank account, the funds within the 401k are then invested into various types of mutual funds, stocks and bonds. All of these investments are completely free of taxes until the time comes for you to withdraw your money from the 401k account. That time is when you reach the age of 59 and a half. That is the great thing about a 401k retirement plan. Starting in the late 1970’s, congress created the 401k retirement plan to allow people to begin saving money, before they retire from their employment. It functions as something of a financial safety net, ready for you when you reach retirement age. There are several benefits of having a 401k aside from being a tax-exempt method of savings. Many employers offer a match program. With a match program, your employer will match part of your contribution into your 401k. This means that however much money you contribute to your 401k, your employer will match a portion of it each pay period. Furthermore, some employers will raise the amount of their contribution depending on the number of years you have worked for them. You have the option to determine where your funds will go when it is invested. That’s another exciting aspect of a 401k. For some, this is significant and provides them the opportunity to boost their retirement plan savings. Additionally, a 401k has portability. If you should ever leave an employer, there are several different options in regard to your 401k. It is possible to simply choose to leave your 401k with your previous employer. This is the easiest option. However, you should be aware that the plan administrator may charge a fee for maintaining your account in your absence. Another option is to roll the 401k over to your current employer’s 401k plan. This will allow you to continue funding your retirement account to add to the money you have already earned and saved.
It is also possible to roll over your 401k into an independent retirement account (IRA). This is an excellent option, and my personal preference, because many employers only offer limited choices for investment. You should have increased control of where your money is spent. This option gives you the greatest amount of control over how your money is invested. Finally, you can always opt to completely cash out your 401k. This option should be considered only in the case of a financial emergency because there are severe penalties for early withdrawal. You must also pay the taxes due for the amount withdrawn.
I hope our explanation was helpful and informative. One of our most frequently asked questions is, “what is a 401k?” It is essential that you fully understand your options when it comes to thinking about your retirement. Remember, if you are 45 or younger, social security may not be available by the time you reach the qualifying age of 62 to begin collecting. Weigh the benefits and consequences of all of your options available to you prior to making a decision about your retirement plan. Think about the long term viability of your retirement plan. Being practical and informed when making your decision will benefit your 401k and your overall retirement goals in the long run.