What is a 401k?
You company probably offers this. Let's break down this investment vehicle!
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Investing:
I would like to begin by reminding everyone how important investing your money should be in your life. Investing makes your money work for you. Money sitting in your savings account earns you little to no interest and devalues as inflation rises.
Yeah, you read that right. You are actually worse off leaving your money in a savings account than if you put your money in the markets for long periods of time.
Today we are going to be talking about the famous 401k. Most of you have probably heard about this from your parents or around the workplace.
A 401k has many benefits and as everything does, also has some drawbacks. So, let us dive into everything you need to know about a 401k!
*This is not investment advice and is strictly my opinion. Consult a professional before investing any of your money as you should not invest your money strictly on what you hear or read about. Reach out to your company’s financial team with any questions you might have about a 401k.
Definition:
The basic definition is simple. This is a retirement savings account, that many companies offer to their employees. Your company will take a specific amount out of your paychecks and put it into this investment account. Once the money is in this account you will be able to select from a wide range of investments options.
Oh, and the best part is, the money taken out of your paycheck is pre-tax, meaning that the money is taken out of your gross total income. Taxes will be calculated once the money is withdrawn depending on when you take it out of the account. Seriously, how awesome is that??
Details:
“What type of investments are commonly found in a 401k account?”
Great question! When money is put into your 401k account you will notice a wide selection of investment opportunities to put that money into. The two primary types of investment have to do with targeting when you are going to retire. The two are:
- Retirement Target-Date Funds
- Bonds / Mutual Funds
These two investment options are long term plays that are designed to reduce risk and show steady growth over the next couple decades as you build you career.
“Is there a limit to how much I can put into my 401k account?”
The short answer is yes. This answer changes, however, based on your age, occupation, and inflation. Below are the current limits on 401k accounts.
- Up to $19,500 per year for employees under the age of 50
- Up to $26,000 per year for those 50 and up
So, when setting the amount you want to put into your 401k account, remember there is a hard cap once you get near $20,000 (for the age range of most of you readers).
“I heard something about employers having a match program, what is that?”
What you just said is free money! If your company has a 401k matching program, that just means they will give you free money for using the investment vehicle.
For example, your company might match up to $100 per paycheck. So, if you put in $100 your company will deposit $100 dollars not attributed to your paycheck into the account as well!
Does that not sound AMAZING??
“When can I take my money out of the account?”
You can take your money out at 59 ½ years old. That is typically what you will see from 401k providers and the IRS unless you have special circumstances. If you want to take the money out earlier, you will face tax penalties that vary between 5% - 15%.
All in All:
Remember this is not your typical savings account. This is an investment account. This means you will see your total rise and fall depending on your investment selection and the financial markets. So, meet with a financial advisor and start planning your 401k strategy today!
Check out other In-Between financial articles:
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