Whether you are considering saving for retirement, or you have started your very first job, it may be a little difficult getting started. Your employer may offer a 40tedsta1 (k); however, you may not know where to get started, which is why this beginner’s guide to 401(k) is just for you.
What Is a 401(k)?
Before you begin reading beginner’s guide to 401(k), it is a good idea to introduce you to what it is. The 401 (k) is a retirement savings account, which is offered to you via your employer. However, if you are self-employed, then you may open a single 401k account. Before we step into the beginner’s guide to 401(k), it is also important to know how it works. Within the account, one sets apart a certain amount of money each month from their paycheck. The payment that is set aside is used to invest money through this account. When it comes to investing, you have the options of investing in mutual funds, bonds, and stocks. Your money will grow overtime and when you retire, you will begin with a heap of money, which has been increasing for years. Until you do not withdraw the money that you earn from your 401 (k) savings, it will not be taxed.
Why Do I Want One?
Before reading beginner’s guide to 401(k), it is also important you know why you should have this account and what it can do for you. When it comes to saving for retirement, then this can be boring, but should be done as soon as possible. Even if you choose to save $50 monthly, this can also work for you. A benefit for a 401 (k) and another reason to keep reading the beginner’s guide to 401(k), is because with this retirement plan you have taxes delayed until the time you withdraw the money during retirement. In simple form, the account decreases tax, which means until you do not withdraw the money, you will not be paying taxes on the money. Eventually, when you do retire, that is when you will have to start paying taxes.
How Do I Pick My Investments?
You will need to pick your investments once you open your 401 (k) account. Your employer will come up with a list of options, which they will work on with an investment broker. What this means is, the list you are offered is what you are stuck with, even if it is not so brilliant. When it comes to selecting the fund, there are five major types, all of which have different risk levels, these are:
- Stock funds
- Target-date funds
- Blended-fund investments
- Bonds/managed income
- Money market funds
Stock funds cover several stocks, which you may invest a percentage of your account in. Target-date funds are pretty basic and simple. With this fund, you pick the matching fund based on the target date for retirement. Much maintenance is not needed, as it is all so simple due to the fact funds change your benefit distribution overtime. However, the fees of this type of fund may be higher. Blended-fund investments have a set ratio of bonds and stocks. When it comes to selecting one, then this highly depends on your situation. When you do consider this fund, it is important you take into account the number of years you have until retirement as well as your tolerance risk. Bonds/managed income funds are intended to protect your money. However, with these funds, your money will not grow much. Money market funds are famous as a ‘glorified CD’. They only just keep up with increase rates, which is why you should avoid this type of fund if you wish that your money grows.
How Much Should I Invest?
Deciding how much to invest is an important section when it comes to beginner’s guide to 401(k). There are a couple of important things that need to be considered when deciding how much to invest. It is important you take into account the following points:
- Income
- Budget
- Employer matching
- Contribution limits
Employer Matching
So, as it will be your employer giving you money, one thing you may want to do is take as much advantage as you can. Taking more advantage means, it will be better for you. One thing you may want to consider is to contribute the minimum amount that is essential in order to make you eligible to receive a match from your employer.
Contribution Limits
When it comes to saving in your 401 (k) account, it is important that you know there are limits. In the year 2014, you cannot pay more than $17,500 from your very own pocket. This is for employees that are aged 49 and below. However, if you are over 50, then the limit for you is $23,000. Although, if you do have an employer match, this allows you to save more than your individual limit. The amount that you save with your employers match is known as the supreme joint contribution, which is $52,000. For those who are over 50, the amount is $57,500.
Common 401(k) Mistakes
An important part in the beginner’s guide to 401(k) is not making the common mistakes. To discover these, be sure to have a read of beginner’s guide to starting a 401(k) (Part 2).