What You Need to Know About Your 401(k)
Starting a new job is exciting! There are probably some factors of starting a new job that may leave you confused. One of those being a 401k plan. Many companies give you the option on whether or not you’d like to participate. While you may want the extra money, the sooner you can start putting money towards a 401k the better off you will be in the long run. However, no matter your age it is never too late to begin contributing towards your retirement and to start saving for your future.
A 401k is an employer-based retirement savings account known as a defined contribution plan. Basically, the money you put towards your 401k is pretax from your salary. This, in turn, lowers your taxable income and can help cut your tax bill. Take for example that you make $4,000 each month and you put $500 into your 401k plan, only $3,500 of your monthly income will be taxed.
There is a Limit
While it would be nice to contribute as much as you want, the IRS has an annual limit set on how much money can be put into a 401k. This limit may change and is adjusted for inflation. If you cannot afford to contribute the maximum amount into your plan, try to put at least enough to take advantage of your company’s match – if they offer one.
You May Get Free Money
Who doesn’t love free money? Some companies will match your contribution up to a certain percentage. For example, 50 cents for every dollar you contribute up to 6% of your pay. It’s important to know your company’s policy and what their match is. Some companies will even contribute to an employees account whether they contribute or not. While other companies provide the match in company stock.
There are Fees
Sadly, saving for your retirement doesn’t come free. Be sure to pay attention to each fund’s expense ratio – this is a measure of a fund’s operating expenses as an annual percentage. An expense ratio of one percent or less is a reasonable amount.
There May Be a Roth Option
There are traditional 401ks and then there are Roth 401ks. Not every plan will offer the Roth option. However, if you choose to go with Roth, know that you are allowed to put in after-tax money in exchange for tax-free withdrawals in the future. The decision is completely yours to make, just be sure to weigh both options if you have them.
If you have questions regarding 401k or Roth, contact Care Financial. Care Financial is a privately owned and operated business providing families, individuals and businesses with comprehensive wealth management strategies. Contact us online at www.carefinancialonline.com or call us at 251-633-7122.