Everyone needs to invest for retirement, but many people don’t. Why is that? It’s hard to start investing when you don’t know where to begin. With the recent economic downturn, so many people are fearful of the stock market. But investing does not have to be scary. A savings account does not offer you any growth over time, but a retirement account will help you grow your money and save for the future. A 401k is a type of investment account that allows you to invest money on a tax-deferred basis, and is one of the most popular options for retirement. Every day that goes by it increases your risk of becoming one of the millions of Americans living in poverty after they retire if you are not properly prepared. So lets go over what you need to know to Start Investing in your First 401(k) account!
What is a 401(k) account?
A 401(k) is a retirement plan in which employees save for their later years by putting money into an account that earns interest until they withdraw it. A Roth 401(k) is a variation on this theme, in which you pay taxes when you put the money in but then don’t have to pay any more taxes on it when you take it out.
As with other types of retirement plans, your employer contributes money to your 401(k), and your contributions are also invested until retirement age. However, unlike with traditional IRAs or other savings vehicles like CD’s or bonds, many employers make matching contributions to their employees’ accounts—meaning that if an employee saves $1 into his Roth 401(k), the company will contribute another dollar up to certain limits (usually around 4% of salary). This means that people who invest early can increase both their own savings rate as well as the amount they receive from their employer over time.
Starting Your First 401k
The 401k is a retirement plan that allows you to save for retirement and reduce your taxable income. The employer-sponsored 401k is a tax-deferred retirement plan, which means your contributions are not taxed until withdrawn from the account. It is also an example of a defined contribution plan, meaning that it provides participants with some funds each year based on their contributions and employer matching, but does not guarantee any level of benefits or payouts at all. Today, we will answer some common questions about investing in your first 401k.
Should I get a 401k from work?
If you’re reading this, it’s likely that you’ve got a 401k account. The next step is to figure out whether or not it’s time to start investing in your first 401k.
If you have a 401k from work, the answer is a resounding yes! But before we get into why investing in your first 401k is so important, let’s talk about what a 401(k) is. A 401(k) is an investment plan offered by employers that allows employees to save for retirement via pre-tax contributions from their paycheck. By contributing money before taxes are taken out of each paycheck and putting the money into stocks and other securities (like bonds), your investments will grow faster than they would if they were sitting in plain old savings accounts—and because they grow faster than inflation while simultaneously being sheltered from tax liability until retirement age or when you withdraw them as part of an approved withdrawal plan (like early retirement or medical reasons), because of this 401(k)s have a tremendous potential for building real wealth over time!
Can I withdraw funds from my 401k?
Yes, you can withdraw funds from your 401k at any time. You are not required to wait until retirement age to begin taking out money. However, there are certain stipulations when withdrawing funds from your 401k:
- You can withdraw funds from your 401k for any reason—but you will pay taxes on the amount you withdraw.
- If you’re younger than 59 ½ years old and take a loan out of your 401k account or make a withdrawal, then that amount is considered taxable income and must be reported on your federal tax return form (1040).
How much can you contribute to a 401k?
The IRS limits the amount of money that you can contribute to your 401k. If you are under 50, the limit is $19,000 per year. If you are over 50, the limit is $25,000 per year.
Tax Benefits for Roth 401ks
- There are no income limits for contributing to a Roth 401k. This means if you’re self-employed and making more than $133,000 per year as a single filer or $194,000 as a married couple filing jointly, you can contribute to a traditional 401k.
- You don’t need to wait until you turn 59 1/2 years old to withdraw from your Roth 401k either. In fact, there are no restrictions on when you can access the funds in your account except that they must be used for retirement purposes (i.e., funding an IRA or taking out an annuity).
- There’s also no required minimum distribution (RMD) requirement with Roth 401ks; unlike with traditional IRAs and other tax advantaged accounts where withdrawals must start at age 70 1/2, there’s no such provision with Roth IRAs because any contributions made to them were already included in gross income and taxed accordingly before they were deposited into the plan!
Conclusion
The most important thing is to start saving for retirement as soon as possible. The earlier you can start contributing to a 401k the better off you’ll be in the long run. If your employer offers a 401k, then it makes sense to take advantage of this opportunity and contribute at least enough money into your account each year so that it can grow over time.
