Planning for retirement is tricky. It seems like we can always find 100 other things to spend our hard-earned money on. But saving for retirement is a crucial part of your overall financial wellness and can help to maintain your standard of living during your retirement years. So, the question is, what’s the best way for you to start saving for your retirement today? The answer is taking advantage of your employer’s 401(k) plan.
What is a 401(k)?
A 401(k) is a retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck. Often, the employer will also offer to match a percentage of the employee’s contribution and/or make an contribution on behalf of the employee. The plan may offer Traditional pre-tax contributions or Roth after-tax contributions. Learn more about the differences between a 401(k) or Roth 401(k).
What benefits does a Traditional 401(k) offer?
A 401(k) retirement savings plan offers unique benefits over a traditional savings account:
- Traditional contributions are made on a pre-tax basis, reducing your current taxable income
- The earnings on your contributions grow tax-deferred. You don’t pay tax until you take a lump sum distribution
- Your employer may match a portion of your contribution, increasing your overall savings
A 401(k) allows you to set aside money specifically for retirement. So when you are ready to retire, the account is used to supplement your retirement income.
How do you maximize the benefits of a 401(k)?
To make the most of your 401(k), you need to take advantage of your employer’s match offering. Ask your HR representative or employee benefits administrator how much your company will match. The amount of the match can vary widely by company. Regardless, your employer’s match is free money to you, so set a goal to defer as much as you are able, but at least enough to get the full match – or work toward that amount.
There are also limits on the maximum contribution you can make to your 401(k). If you can meet the maximum contribution with your current financial position, consider doing it each year. Maxing out the contribution amount is one way to ensure you are creating a comfortable retirement savings. But if your current financial situation doesn’t allow you to contribute the maximum amount, ensure you are at least meeting the minimum for your employer’s matching to kick in.
Learn more about budgeting for retirement with your 401(k) here.
What if you move jobs?
Keep it tax deferred! You’ve worked so hard to save for your retirement, so if you haven’t yet reached normal retirement age, you have options to keep it tax deferred and avoid taxes and/or penalties for early distribution. You have options:
- You may be able to leave it in your former employer’s plan
- If your new employer offers a qualified retirement plan which accepts rollovers, you can roll it into that plan
- You can roll it into an Individual Retirement Account (IRA)