The 401(k) plan is a type of employer-sponsored retirement plan named after a section of the United States Internal Revenue Code. A 401(k) plan allows a worker to save for retirement while deferring income taxes on the saved money or earnings until withdrawal.
If your company offers a 401k retirement plan, which most companies now do, then you are given the opportunity to start investing towards your retirement. Your company will provide you with a list of funds they use for the plans that they offer and gives you the choice of which to invest in and also the percentage of how much you can invest.
Now, all you need know is how to get started. Contributing to a 401k plan is like investing in a car, it can be very useful as long as you don't crash.
First off, you need to figure out how much you're allowed to put in your 401k each year. When you find out how much your able to put in, you need to max it out each year if possible. Especially if you're just now starting to plan for retirement and you have less then 20 years, you're gonna have to put more away then someone who still has more than 35 years left. Either situation, you should still try to put in as much as your allowed.
Then, find out if your employer offers any kinds of matching contribution. The typical employer will match 50% of what you put in, so 50 cents to the dollar, which is a sweet deal.
Overall you want to start asap. Starting early will give you a huge lead than someone starting later on.
So the major benefits of 401k plans:
- Dollar-Cost Averaging - 401k plans are invested at regular intervals by payroll deduction. This helps force you to save, and it smooths out the bumps inherent in any futile attempt to time the stock market.
- Employer Matching - Most, but not all, employers will match a certain percentage of the funds that you contribute. This is free money!
- Tax Benefits - 401k plans allow individuals to invest up to the current federal limit (last time I checked it was $10,000 per year), and the interest earned is tax-deferred and continues to grow until you retire.
- Compound Interest - Start saving just a little bit each and every month and you can build a size-able fortune over time. Check here for an interesting story about Rick and Harper.
401k plans are very popular and an excellent way to plan for your retirement. Keep in mind as with any other investment, you still need to carefully watch your portfolio and make wise investment choices.