As a student or recent grad, it’s easy to overlook anything involving retirement. After all, that’s quite a ways down the line! But when it comes to a 401(k) plan, this is something you should look into now. We listed everything you need to know to get started.
What is a 401(k)?
Basically, it’s like a savings account through your employer that racks up money for you to use after retirement. You can start using this money once you’re 59½ years old, or if you’re 55 and you’ve left your job. The sooner you start saving, the more your money will grow in this account.
How much of your salary should you contribute to your 401(k)? This number is totally up to you, but it’s generally suggested that you contribute around 10%. Keep in mind—the more money you set aside, the more growth you will see.
Why start a 401(k) instead of a normal savings account? There are quite a few perks that we’ll list out in this post. Let’s start out with taxes.
A 401(k) lets your money grow without paying income taxes. There are a couple of ways this benefits you. Let’s say you’re making $45,000 a year, and you set aside 10% ($4,500) for your retirement account. You’ll now only have to pay income taxes for a $40,500-a-year salary. The less tax money you dish out this year, the more money you have now to spend as you please.
You will eventually pay the income taxes on the money you’re setting aside once you start withdrawing from the account. The good part? After you’ve retired, your tax rate will be lower than it would have been otherwise.
Another major perk of a 401(k) is that many companies offer some sort of matching funds. Basically, your employer will offer to match your contributions up to a certain percentage of your income.
Let’s go back to that $45,000 salary. Your employer may offer to match 100% of your contributions for up to 10% of your salary. So, if you’re contributing $4,500 (10% of your salary), your employer will also contribute $4,500. This is FREE money that is put into your account! Let me repeat: FREE.
Part of setting up your 401(k) is deciding how you want your money invested. The way you invest your money affects how much your money grows in your account, so this can be tricky. You’ll likely be given a list of options — like bonds, stock, or mutual funds—and it’s up to you to choose the best fit. Make sure to do your research and weigh the risk factors before making your decision!
Do you have any questions about 401(k) plans? Ask us in the comments below!