3 Things You Didn’t Know About Investing in a 401K
By Kevin Faber
Copyright: krisckam / 123RF Stock Photo
401 (k) plans. Chances are you’ve heard about them, but where do they get their name and why should you worry about investing in one?
In the United States, a 401(k) plan is the tax-qualified, defined-contribution pension account defined in subsection 401(k) of the Internal Revenue Code. In layman’s terms, investing in a 401(k) is saving for retirement. You probably already knew that, but here are three things you may not have known about investing in a 401(k).
Investing in a 401(k) is easy and nearly automatic
Investing in a 401(k) plan is exceedingly easy, especially since it usually comes out of your paycheck automatically, unless you specify otherwise. Companies, with your consent, will take out a very small portion (the amount you specify) off your paycheck each month and contribute it to your 401(k). The majority of companies will match at least a portion of the money you contribute, some matching up to one hundred percent of your funds up to a certain point.
Since the company has typically already done you the service of setting up an account, you won’t have to worry about talking to a bank or going through some long, convoluted process to get the ball rolling. You’ll get your regular paycheck with part of it already invested so all the worry is taken away.
Starting Early is Critical
You might think you need to have a lot of income before you consider contributing to a 401(k). Don’t make the mistake of waiting until you are even as little as only 5 years into your career to start investing.
Investment earnings are reinvested in your account, so the sooner you start, the better off you’ll be. Starting your investment at age 25 could potentially more than double the amount you would end up with at age 65, starting a mere 10 years later.
It’s Important to take intelligent considerations when switching jobs
When you switch jobs, you have a few options when it comes to your 401(k). You can pull out all the current funds in one lump sum, invest them in an IRA (Individual Retirement Account), or you can usually roll the funds over into your new 401(k).
While it can be tempting to cash out your 401(k) upon switching jobs, it’s critical to check your previous company’s policy to make sure you are making the best decision. Sometimes they will allow you to keep your money in for a period of time that extends beyond your date of employment which could increase your return and lower your tax liability. In short, be patient and explore your options before jumping the gun.
Remember these simple tips before running headlong into a 401(k) plan and you’ll be well on your way to a relaxing poolside retirement. And who knows, maybe your friend could use some advice as well.
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