Description: The main idea of the article centers on 401k. The author will go over everything you need to know about what 401k is which is a retirement account through your employer, you will learn something about its taxes, the early withdrawal penalty you want, the best period for applying for it and the various funds charge.
I want to go over everything you need to know about a 401k, so first of all, what is it? It’s basically a retirement account through your employer, every company does it a little differently, but the most common setup is some sort of percentage match.
For example, your company policy might be a five percent match, what that means is that the company will match up to five percent of the percentage you selected, so if you pick 2%, the company will also put in 2%, if you pay 4%, they’ll put in four.
If you go all the way up to 5%, they’ll put in five, now you can go beyond 5% if you choose, but the company will only match up to 5%, so you select 10%, the company match will still be 5%.
So let’s take a look at an example, you get paid $4,000 a month before taxes which is basically your gross income and you elected to do 5%, because you wanted the maximum match possible from your company which is also 5%, so 5% of $4,000 is $200.
So you will put in $200 into your 401k account and your company will also put in $200 into the account, where does this money go? Typically 401k plans will have different funds you can select from, you’ll have to do a little bit of research into your fund options.
But typically, what you’ll find in a fund is some sort of mix between stocks and bonds, for example, you might have one fund that has 100 percent stocks or another fund, I might have 50 percent stocks and fifty percent bonds.
You should know that stocks are generally more risky short term, but have better returns over the long term, in contrast, bonds are less risky in the short term, but have lower returns, long term.
So the general rule is that if you’re younger, you want to be mostly invested in stocks and if you’re older, you want to be mostly invested in bonds, you will have some flexibility and picking the funds.
For example, you don’t have to put 100% of your contributions all into one fund, you can choose to have say 50% of your contributions to go to fund one which is all stocks and the other 50% to go into fund 2 which is say 50% stocks and 50% bonds.
So it’s good to know you have some options there now, let’s go over some additional things you should know, the first one I want to talk about is our taxes, this is cool, because your contributions to your 401k are being made before taxes.
In other words, the contributions are going from your gross income, you will not be taxed for the money you put into your 401k, let’s look at a quick example, same made $48,000 this year before taxes and you chose to contribute 5% to your 401k, so over the year, you put in two thousand four hundred dollars into your 401k.
If we subtract that out of the 48 thousand, we’re left with forty five thousand six hundred, so in the current year, you’ll only be taxed on the forty five thousand six hundred, the money that you put into your 401k is not taxable.
However, this doesn’t mean you’ll never get taxed on the money that goes into your 401k, when you pull the money out of your 401k, it is only taxable.
Then the next thing I want to talk about is the early withdrawal penalty which you want to wait till you’re 59 and a half to start pulling money out, otherwise, you’re going to get slapped with a 10% penalty for early withdrawal.
Typically people tap into their 401k to deal with an emergency situation that came up or they might need some extra cash for a down payment on a house, remember that if you take the money out before age 59 and a half, you’ll have to pay both the 10% early withdrawal fee and taxes on any money you take out.
So you’re into twenty five percent tax bracket add into 10% early withdrawal fee and that’s thirty five percent, you’ll have to pay for any money that you take out, so if you have $100,000 in there and you pull it out before fifty nine and a half, you’re only going to see $65,000 of that.
The next thing I want to go over is the besting period the vesting period is, how long you need to stay at the company in order to keep the company’s match, every company does it a little differently.
Some companies have instant vesting while other companies might have a one-year or two-year rule, so your company has a two-year vesting period rule, what this means is that you’ll have to stay at the company for two years from your date of hire.
If you wish to keep any contributions your company made to your 401k, the portion of the contributions you made to your 401k yourself is always yours whether you’re within the vesting period or not.
However, if you want to keep the company’s contributions to your 401k, make sure you stay at the company until the vesting period.
Then it is the last thing I want to touch upon, it’s very important, because it’s often overlooked, the various funds charge earlier, I mentioned that there are different funds, you can pick them, it’s important to know that these funds often have very different fees.
So make sure you know what these are being charged for going with a certain fun and try to avoid high fee funds, as they will eat into your profits, so in conclusion, a 401k is a no brainer, if your company offers it, take it, it’s basically free money for retirement, if you found this helpful, be sure to hit that like button and subscribe for more awesome materials.