The things no one tells you about
Investing in retirement is an important part of ensuring your working years are productive, and that you’ll be financially comfortable enough to retire when the time comes. 401(k)s are among the most popular investment options for working individuals because they are often offered through the company or entity you work for. While you have a choice to opt in or out, opting in really has no pitfalls, and can help you start investing for your retirement easily and early. With all that said, however, 401(k)s and choosing the proper investments can seem confusing for some. So, what do you need to know about 401(k)s to make an informed decision?
What is a 401(k)?
A 401(k) is an investment account offered by most mid and large companies. The money you choose to add to your account is pre-tax money, and you can set the amount you’d like removed from your gross income for investment purposes. Each company offers different plans and different investment schedules. The pre-tax money is a good way to start investing for retirement. Most 401(k)s have penalties for removing your funds early. When you cash out a 401(k), whether it is after you leave the company or when you are ready to retire, the money cashed out is considered taxable income.
Explore Your Employer’s Matching Policy
When you sign up for an investment account, it is important to know your employer’s policy on matching. Some companies will offer a 100% match. In these cases, the employer will match each dollar you pay into the account. Other companies may offer a 50% match, where they match .50 for every dollar. Often times, some employers will not offer 401(k) matches at all. It is important to read through the literature to know what your employer is contributing and the stipulations attached to it; such as how long you have to be at the company before the money vests and is yours to keep.
What is Vesting?
Vesting is a term that is attached to many 401(k) policies. When a company agrees to match your investment, either by offering you a dollar for every dollar you invest, or half of what you invest, there will be requirements you need to meet before that money is considered yours. You may need to stay at the company for 6 months or 3 years to have the rights to the company’s investment transferred to you. If you were to leave the company prior to the vesting period, that money is returned to the company, but you still keep your personal contributions.
You Keep Your 401(k) Even After You Leave the Company
A lot of young workers don’t bother to sign up for their company's investment accounts because they don’t think they’ll be with the company long term. That is a big mistake, explain experts. The money is yours, whether you are with the company for a year of 15 years. After you leave a company, you can roll over your cash into your new company’s 401(k) or go independent with an IRA. If you roll the cash into a new investment, you won’t be taxed on it. If you choose to cash out your 401(k) you’ll be taxed on the money and incur a 10% penalty for early withdrawal.
Now that you have the basics of investing in 401(k)s, it is time to check your existing investments or opt into your company’s investment structure. Before making any big decisions, however, it is best to speak to a financial advisor to ensure your money is really working for you.
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