What is a 401k? Must-Know Retirement Plan Basics

Did you know that 48% of older Americans have no savings in retirement plans (such as an IRA or 401k)? If you’re one of them, there’s a good chance that you’ll face very serious financial issues as you grow older.

The good news is that it’s never too late to get started! Once you understand the must-know retirement plan basics, you can open an account and start putting money away for your future. 

Stick with us as we answer important questions like “What is a 401k plan?” and “How does a 401k work.” By the time we’re done, you’ll feel confident opening up one of your own.


What Is a 401k: The Basics

First things first: what is a 401k? It’s a savings and investment plan that’s offered by employers. 

This type of plan allows you to put away a portion of your paycheck into an investment account that is also managed by you. You can then invest the money and enjoy tax-free growth until you’re ready to withdraw it. Whether you contributed to a Traditional 401k or a Roth 401k will determine if those dollars are withdrawn taxable or tax-free. 

Your 401k plan will have a pre-selected lineup of investment options you can choose from, simplifying the process.


Advantages of a 401k

The 401k provides an easy approach to your retirement savings. It’s quick, easy, and automatic. In many cases, employers may also match your contributions and make additional profit-sharing contributions into your account.

If your employer matches your 401k contributions, that's free money!

This is essentially FREE MONEY! With so many Americans financially unprepared for retirement, it makes sense to take advantage of this opportunity if you can.

An additional advantage during your working years may be the ability for you to get a tax deduction up front, which is valuable if you’re in a high tax bracket. And, if you make smart investment choices, you may also earn far more than you would in a regular savings account.


Additional Contributions

Unlike IRAs, a 401k can allow you to contribute more into your account. For example, current contribution limits for individuals in either a Traditional or Roth IRA are $6,000 per year ($7,000 for age 50+). Limits on contributions for 401k–Traditional or Roth–are $19,500 ($26,000 for age 50+). 

Couple your contributions with those provided by your employer and the limits rise up to $57,000 annually ($63,500 for age 50+). 

That’s a massive difference over time.


Potential Drawbacks

An important aspect of ANY RETIREMENT PLAN is that you should NEVER invest money that you might probably need in the short-term. One should view ANY TYPE of retirement account as money for the future, not a bank account. 

One of the biggest potential drawbacks is that you may face taxes and penalties if you withdraw money from your 401k before you reach age 59½. Also, the money you invest isn’t FDIC insured and you could lose money depending on the investment you choose. However, with solid advice, you can decrease the chances of making poor investment choices.

Curious about your 401k? Here's what you should know.

Additionally, there are usually higher fees involved in a 401k plan. Although these are usually reasonable, this is something you’ll need to keep an eye on. If you get into a plan with high fees, this can eat away at your investment profits. 

However, don’t let the fees keep you from investing in a plan, especially if your options are limited. 


Secure Your Financial Future Today

Now that we’ve answered the question, “What is a 401k?” and discussed the pros and cons, you might be ready to jump in. While this is a great idea, it’s also best to have a solid financial plan. That’s where we come in!

Retirement looks different for different people, and you need professional advice to make the best possible decision for your individual circumstances. Contact us today to schedule a consultation.

Lets chat about your personal goals

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