If you’ve ever worked for an employer who offers a retirement plan, you’ve probably heard the term 401(k).
Here’s a piece of trivia to impress your colleagues with: While saving $401,000 for retirement could help you after you leave the workforce (and saving even more would be better!), that dollar amount has nothing to do with why this retirement plan is called a 401(k)!
Plans like the 401(k) — and it’s relatives like the 401(a), 403(b) and 503(b) — actually are named after the subsection of the U.S. Internal Revenue Service (IRS) code they are listed under.
Here are a few more fun (and very helpful!) facts you should know about your 401(k):
The Sooner the Better! Your retirement funds will really benefit from the “time value of money.” When you save for retirement early in your career, you give those savings much more time to grow to help you later in life!
Take the Free Money from Your Employer. For every dollar you save in your employer-sponsored 401(k() plan, most employers match your contribution up to a certain percentage of your salary. Depending on the company you work for and the job you have, your employer could give you thousands of dollars in extra retirement savings just for filling out some easy paperwork. Talk to your human resources department today!
A 401(k) Can Lower Your Taxes. The contributions you make to a 401(k) and any funds that your employer puts into your account are tax free! Any interest, dividends and capital gains you earn are also tax free. You won’t have to pay income tax on any of that until you withdraw money from your account once you retire.
Over 50? Catch up! If you’re over the age of 50, you may be able to put some extra money into your 401(k) account through what’s called a “catch-up” contribution. There are limits and conditions, but it’s worthwhile to talk to your human resources department or retirement expert about doing this!
Research Other Ways to Save. Your 401(k) is a great retirement savings vehicle, but there are a lot of other options out there, including the IRA, Roth IRA (neither are named for tax code sections), solo 401(k) plans for self-employed people and more. Plus, using more than one savings method for retirement — called diversifying — can help you save even more.
Sign up for our free webinar, "Your Cash Flow Statement," presented by CommonWealth One Financial Network Financial Advisor Timothy States. Tim will be talking about how to take charge of your money so you can achieve your retirement goals and much more on Wednesday, January 31 at 2:00 p.m. and Thursday, February 1 at 11:00 a.m. You can sign up for our seminars easily online.
