Saving for retirement can be done in many ways, but a 401k may be one of your best options. This plan is offered by employers, and often gives you the opportunity to receive matching funds from the company where you work. A 401(k) can enable you to accumulate funds faster than most other plans, allowing you to build up your retirement account with some free money.
An employer may offer you one of two different types of 401k’s. There is a traditional 401k, and there is a Roth 401K. The Wall Street Journal explains the differences: a traditional 401k takes out money before taxes, which reduces the amount of income you pay taxes on each year. Instead, taxes will be paid on your withdrawals, which cannot be made until you are 59 1/2 – or, if you do make a withdrawal before you reach that age, it will have an automatic 10 percent penalty. A Roth IRA puts money into your account after you have already paid taxes, which means that no taxes are paid after you withdraw the money, but you can only withdraw the money without penalty if you have had the account for at least five years.
Many employers that offer 401k’s will also put in matching funds – up to a limit. The most common amount that they will match is three percent of your income annually.
Making sure that you have enough savings for retirement will depend on how much you put into your 401k, if it is the only instrument you are going to use. Recently, the Wall Street Journal reported that the biggest provider of 401ks, the Vanguard Group, said that many people do not have enough to retire on today. The economic problems in recent years has meant that now many people who relied on their retirement plans did not put enough away to be able to retire at 65. They now advise that you put 12 to 15 percent (recommended amount used to be between 9 to 12 percent) of your income into the plan, which includes the portion contributed by your employer.
One important thing to consider about a 401k is the vesting period. This is a set time that you must spend with an employer before you are allowed to keep any of the money that was contributed to your 401k by your employer. If you leave that job and go somewhere else, you will have lost some or all of that money, says Money.MSN.
Before you put your trust into a 401k and think that it will meet all your retirement needs and goals, it would help to make sure first. You can find 401k retirement calculators online, such as this one at SmartMoney, which will help you determine if you are saving enough now, or not. It also lets you calculate inflation to see how your savings will be affected.
Some employers do not allow new employees to join their 401k plan until they have been there for a while – often between three months to a year. If you are in this situation, it is to your advantage to invest a similar amount into another plan, such as an IRA, to start saving for retirement. The more you save now, the better off you will be during your “golden years.”