Monday, September 30, 2013

401(k): Doesn't It Just *Sound* Like A Good Idea?

I would totally wander through a maze looking for free money. 
Read this if: 

1) You are interested in doing something with your money besides putting it in checking or savings. 
2) You know that your employer offers a 401(k) but you don't know how it works. 

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I like to think that there are two kinds of money: retirement money and non-retirement money. Retirement money is the stuff that you earn that you set aside for when you don't want to (or can't) work anymore, and it's special because there are lots of benefits that apply specifically to retirement accounts. 

I also like to think that there are two kinds of retirement money: the kind that you put in a 401(k) and the kind you put in IRAs (Individual Retirement Account). I'll talk about the 401(k) for now. 


What is it?

Some companies offer their employees the option to enroll in a 401(k) to encourage saving. It is a type of account, and the money inside is invested in things like mutual funds or bonds (among many others). 

What's special about it? 

There are a couple of benefits that apply to 401(k) accounts. For one, there is the employer match. Your company might offer something where, for every dollar you put into a 401(k), they'll also put in a dollar (up to a certain predetermined limit). This is awesome because it's free money. FREE MONEY!!!

Another benefit is that the money you put in does not get taxed until you withdraw from it (this is called "tax-defered income"). This is good because that means in the present, you have more money to invest since it wasn't taken away by tax. There are penalties if you withdraw before retirement age (as expected, being that the whole point was to encourage you to save for retirement). You will pay taxes on the money when you withdraw, but again: having more money to invest earlier is always a good thing. 

What's not great about it?

Ideally, the money you put into a 401(k) should be left alone. If for some reason, in an emergency, you need the money, you can withdraw but you would need to pay a penalty. Also, if you end up leaving the company you started the 401(k) with, then you have to figure out what you want to do with that money: move it to your new company, leave it at your old company, sell your shares, or change it into an IRA account. 

Bottom Line...

Having a 401(k) can only help you, and if you can make it a goal to contribute enough to maximize the employer contribution, you'll be doing yourself a huge favor! 

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Plan of Action: 

1) Ask your employer if they offer 401(k) plans. If they do, FREE MONEY!!!

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As always, contact me with questions or suggestions! You can either comment directly on the post or send me an email to moneymattersjoan@gmail.com. 

Photo credit: RambergMediaImages via photopin cc

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