Things You Need to Know About a 401K

People may joke about not being able to save for retirement, but there is some truth behind it. In American households, less than half report any savings in their retirement accounts.

Planning for the future for most salaried employees is best done through a 401(k) retirement account. A 401(k) gets government tax advantages and employers often match your contributions. So what do you need to know about the 401(k) before getting started?

Today we take a look at important 401(k) advice and facts, and the latest news for you to read.

401(k): How to Be Ready for Retirement

First, it’s important to differentiate a 401(k) from a Roth IRA, an alternative type of retirement account. The main difference between them is when the government taxes you on the capital gains.

With a Roth IRA, the government taxes you before you put the money into your account. With the 401(k), they tax you when you take it out. So, you are going to have to have good money management skills knowing a decent chunk of your money will go to taxes.

Know Yearly Contributions

The benefit of a 401(k) for personal finance is government advantages. Unlike other investment accounts where you have to pay yearly taxes and all your capital gains, a 401(k) is different. You are only taxed on the lump sum at the end, not any of the gains as it grows.

People would take advantage of this if not for the yearly contribution rule. Basically, this means each year you can only contribute so much money to your 401(k) account. That amount will depend on your tax bracket and income level.

Once you hit a certain amount of contributions per year, you cannot make any more. Doing so will incur a penalty.

Don’t Empty Funds Too Early

Another feature of 401(k) accounts is that you can’t take out the money at will. Doing so incurs a steep penalty that removes any incentive people might gain. After all, this is a retirement account you’re meant to withdraw at retirement age.

You can only take out your 401(k) money when you hit the current legal age limit, no sooner. Make sure to check what age that is before doing so. In some select cases, there may be rules for penalty-free 401k and IRA withdrawals.

Don’t Check Your Account Too Often

Since most people are sinking about $500 per month into their 401(k)s, it’s tempting to watch that money like a hawk. Doing so can only lead to disappointment. As the market fluctuates, the amount in your 401(k) will go up and down, making your investment seem precarious.

401(k)s are meant to be invested in and then ignored. You should certainly check it from time to time every few months, but don’t get dismayed if the number keeps going down. Just make sure you are making enough contributions and go live your life.

Latest News For You to Read

401(k) retirement account is one of the best ways for most working Americans to save for their retirement. Make sure you know how much you can contribute per year, and what penalties there are for over contributing. Don’t take out your money until retirement age.

Find more of the latest news for you to read on our blog.