Everyone needs to understand how their company-sponsored retirement account works.
The 401k account is simple once you know what the jargon means and having a handle on how it works allows you to have more control over your money.
It is a common problem: people think that investing is complicated so they choose to let someone else make those decisions for them, for fear of messing something up.
Particularly with a 401k plan, where this money will be your life line during your elder years, you have to know what happens and how it works so that you can be responsible and active in its growth.
First, a 401k account grows with regular paycheck deposits that happen before taxes are applied.
This has a double advantage.
You get to put away a portion of your paycheck towards the future -- typically you can allocate 10% of your paycheck or $16,500 a year (but your salary and your company's plan might be different, so check with your HR department) -- and because your paycheck is smaller, you pay less in taxes today.
When you withdraw the money, you will owe taxes, but at that point you should be in a lower tax bracket, so it is a win-win.
You decide where to put the money you invest.
Most 401ks have risky, moderate and low-risk funds to choose from.
Depending on your age and you inclination you can allocate the money however you want.
When you move to another job, as the average American worker does three times, your account can follow you!.
A 401k rollover is the tool to use.
The 401k plan rollover usually involves a single form that tells the Benefits department where to send the money.
It is important to execute the rollover because you want all of your money working together to grow to its maximum potential.
People are often afraid that they will owe taxes or something because of the 401k rollover account.
That is not true.
401k rollovers happen under the secure umbrella of the brokerage firm so you will not be charged taxes.
Another benefit of a rollover is that you can choose to transfer the money to another tax-deferred account.
A 401k rollover/IRA or a 401k rollover/Roth is perfectly acceptable.
The traditional IRA works just like a 401k account.
The reason you might fund one in addition to a 401k is to tap into different funds that are not available from your 401k plan.
The Roth IRA is a different animal.
The money you invest in the Roth is post-tax.
That means that the money grows for you and when the time comes to withdraw it, you do not owe taxes.
This is why many financial advisers suggest having a Roth in tandem with a 401k or an IRA.
That can make smart financial sense to spread your tax burden a bit.
Understanding retirement investing is not hard.
Once you understand these basic mechanics, the rest of the concepts fall into place.
The most important part to remember about 401ks is this: Use them! Invest in your future.
It will pay off tomorrow.
The 401k account is simple once you know what the jargon means and having a handle on how it works allows you to have more control over your money.
It is a common problem: people think that investing is complicated so they choose to let someone else make those decisions for them, for fear of messing something up.
Particularly with a 401k plan, where this money will be your life line during your elder years, you have to know what happens and how it works so that you can be responsible and active in its growth.
First, a 401k account grows with regular paycheck deposits that happen before taxes are applied.
This has a double advantage.
You get to put away a portion of your paycheck towards the future -- typically you can allocate 10% of your paycheck or $16,500 a year (but your salary and your company's plan might be different, so check with your HR department) -- and because your paycheck is smaller, you pay less in taxes today.
When you withdraw the money, you will owe taxes, but at that point you should be in a lower tax bracket, so it is a win-win.
You decide where to put the money you invest.
Most 401ks have risky, moderate and low-risk funds to choose from.
Depending on your age and you inclination you can allocate the money however you want.
When you move to another job, as the average American worker does three times, your account can follow you!.
A 401k rollover is the tool to use.
The 401k plan rollover usually involves a single form that tells the Benefits department where to send the money.
It is important to execute the rollover because you want all of your money working together to grow to its maximum potential.
People are often afraid that they will owe taxes or something because of the 401k rollover account.
That is not true.
401k rollovers happen under the secure umbrella of the brokerage firm so you will not be charged taxes.
Another benefit of a rollover is that you can choose to transfer the money to another tax-deferred account.
A 401k rollover/IRA or a 401k rollover/Roth is perfectly acceptable.
The traditional IRA works just like a 401k account.
The reason you might fund one in addition to a 401k is to tap into different funds that are not available from your 401k plan.
The Roth IRA is a different animal.
The money you invest in the Roth is post-tax.
That means that the money grows for you and when the time comes to withdraw it, you do not owe taxes.
This is why many financial advisers suggest having a Roth in tandem with a 401k or an IRA.
That can make smart financial sense to spread your tax burden a bit.
Understanding retirement investing is not hard.
Once you understand these basic mechanics, the rest of the concepts fall into place.
The most important part to remember about 401ks is this: Use them! Invest in your future.
It will pay off tomorrow.