Curious about investing in a 401k and 10 tips to help you develop a useful retirement strategy? Basically, a 401k is a retirement savings plan that workers can use to save money for retirement. The money the workers add to their 401k is considered to be pre-tax dollars; that is, the worker gets to put income he has earned into the retirement account before the money is taxed. When the worker withdraws the money at retirement, he is then taxed on the money, but usually he is in a lower tax bracket and owes less money in taxes than he would have when he earned it and added it to the 401k. Use these tips for investing in a traditional 401k.
- Find out if your employer matches funds. Some employers who offer 401k plans will match what you add to your 401k up to a certain amount, such as six percent. Take advantage of this benefit by contributing at least the amount the employer matches.
- Research whether your employer makes any contributions. Some employers don't offer matching funds but do make some contributions. Research this with your benefits or human resources personnel to find out what your company offers.
- Determine your eligibility regarding vesting. Invest in your company's 401k with confidence by knowing if you have to be vested (that is, be with the company for a certain number of years) before you are eligible to invest in the 401k plan.
- Ask your small business employer if they offer a SIMPLE 401k plan. Some smaller businesses can't offer a traditional 401k plan. Find out if they offer a SIMPLE 401k to help you on the way to saving the most possible for retirement.
- Have deductions made automatically. Set up automatic payment from your paycheck for 401k contributions.
- Find out if a new employer participates in automatic 401k enrollment. Some employers automatically take a portion of wages out to invest in the employee's 401k plan. Discuss this with a new employer to find out their policy.
- Know the limits of elective deferrals. An elective deferral is simply the amount of money an employee elects to have deducted from their paycheck to contribute to the 401k plan. For 2010, the limit is $16,500 for a traditional or safe harbor 401k plan.
- Make catch-up contributions, if applicable. For workers 50 and older, it may be possible to add more money to catch up on retirement contributions by adding more than the maximum amount if you missed some contributions through the years.
- Know investment fees to make wise decisions. Ask your benefits or human resources personnel about fees for the 401k plan you are part of.
- Find out if you're also eligible for a Roth 401k. To qualify to contribute to a Roth 401k, you must earn under a certain amount of money.
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