Saving Smart with a 401(k)

If you work for a company that offers it, a 401(k) savings plan is a great way to boost your retirement savings.

What is a 401(k)?

401(k) plans

According to the Wall Street Journal’s How to Guide to Retirement

A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.

Benefits of a 401(k) Plan

The benefits of a 401(k) are many, chief among these are:

  • You save on taxes. Money is invested in the plan before payroll and other taxes are withheld.
  • The investment grows faster since while your money is in the plan taxes are deferred and your money compounds more quickly.
  • Many employers will match your contribution up to 6% of your yearly salary. And you can invest up to $23,000 annually in your plan when you’re over 50 and up to $17,500 otherwise. The typical employer match is around $0.50 on the dollar so a maximum investment for the above categories could net you as much as $11,500 in free, tax-deferred money annually. Not a bad deal!

Now with all the great benefits of a 401(k) plan there are also some pretty stringent rules and regulations that apply to when you can use the money. For example, if you withdraw the money before 59 1/2 you’ll have to pay income tax and a 10% penalty. It’s to your advantage to educate yourself on all of the nuances of a 401(k) savings plan prior to making your investment. Your employer probably has resources available for this purpose and a good, basic guide to understanding the ins and outs of these plans is CNN’s Money 101 Guide to Your 401(k).

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