Investing In a 401k Retirement Plan: Part 1

Investing in a 401k retirement plan could be one of the smartest decisions you ever make. If you want to be sure that you’ve got the means to sustain yourself after your life in the workforce has come to a close, having a 401k plan will be paramount. Some companies offer them to employees and if your company does, it would be wise for you to take advantage of this useful perk. It’s very easy to just forget about opening a 401k account if you don’t understand how they work. Most people don’t even think twice about investing in a 401k retirement plan because they feel they don’t have the “expertise” necessary to manage one or they’re scared of what might happen if they were to leave their company. Investing in a 401k retirement plan is a wise idea for the future and you should know about the pros and cons of this kind of account. Learn more about the less obvious benefits of having a 401k so you can relax and enjoy your retirement when the time comes around.


The Basics

If you’re self-employed or you work for a company that provides 401k plans, it should be fairly easy to start investing in a 401k retirement plan. A 401k gives you the option to contribute a percentage of your paycheck to the account before taxes have been deducted. This money can be used to invest in different stocks, bonds and money market funds. Since you deduct money to contribute to your 401k account before taxes are taken out, these contributions reduce the amount of tax you have to pay as well as your annual taxable income. You don’t have to pay taxes on your contributions or account growth until you decide to withdraw funds in the future.

The Roth 401k is another account option that is rising in popularity. If you decide to get a Roth 401k, you pay taxes on your contributions upfront and you typically won’t have to pay taxes on withdrawals you make in the future. The Roth 401k differs from the Roth IRA because the Roth 401k has no income limitations: after a certain salary cap is surpassed, those high earners aren’t allowed to contribute to a Roth IRA.

In 2012, there were 52 million employees managing some sort of 401k account. It’s clear that more people are waking up to the highlights of investing in a 401k retirement plan and you have a whole lot more to gain that you do to lose. If you need more convincing, just take a look at these positive points.

·         The Assets In Your 401k Are Protected By Federal Law.

The Employee Retirement Income Security Act of 1974 applies to all qualified workplace retirement plans and it sets the basic standards for those employers that set up the plans and the administrators that are charged with managing the plans. ERISA was put into law to protect the interests of the employee and their beneficiaries. With this protection, you can expect full disclosure about the funding and features of your retirement plan, the right to sue for benefits if you find that your plan is being poorly managed and a claims and appeals process designed to ensure that you receive your benefits. You’ll also be paid out for certain benefits if your plan ever got terminated or you lost your job. Even still, you might not realize that your 401k is protected from creditors. If for some reason you ever became unable to pay your car loan down, those creditors that you owe wouldn’t be able to get access to funds tucked away in your retirement account.

·         You Might Be Able To Get Your Contributions Matched By Your Employer.

Some employers offer a contribution match that’s included once you open your 401k account. Although the contribution limits vary, any amount of free money you can get will greatly increase the value of your account and this clause really makes investing in a 401k retirement plan that much more enticing. It’s almost like you’re getting a raise simply for putting money aside to use later.

·         Keep On Contributing As Much As Possible!

Once you’ve got it in your mind to keep your contributions up, you should continue to raise the amount you contribute each year. In 2015, the contribution limit is up to $18,000 for those under 50 and $24,000. It might seem like a lot at first glance, but it’s important that you try and contribute at least 10 to 15% of your gross income. Higher earners will have to do a little more work to make the most of their contributions. Once you hit your annual limit, you want to make sure that your plan will stop taking contributions. If you want to avoid contributing too much, strive to make flat payments from each paycheck.

Investing in a 401k retirement plan is one of the smartest things you can do!