Retirement is the prize that hopefully awaits us all after decades of hard work. But what exactly comes with retirement? To help plan for retirement, an individual can put money into a 401k plan. A 401k provides tax benefits and employers may provide funding in addition to a person’s income.
“What is a 401k?” This is a question that you need to be aware of when you start to work under an employer or you could potentially lose thousands of dollars. Because of this potential loss, “Some employers in the U.S. now enroll workers automatically, the same way the U.K. requires. That method is especially powerful because it employs two levels of automatic saving: auto-enrollment in the plan and auto-deduction from paychecks” (Arnold, NPR).
Authur Olunwa, who has worked in the investment industry for over 20 years, said that the benefit of enrolling in a 401k with your employer is Whatever is put into your 401k from your paycheck is exempt from government taxes. This percentage from your check becomes pre-taxed income (Olunwa). The best part about this is that even more money can be unlocked.
When choosing a 401k plan, you may be presented with two options: a traditional and a Roth. A traditional plan, such as the one Olunwa explained, invests money before taxes are removed. “With a Roth, employees make contributions with post-tax income but can make withdrawals tax-free” (Fernando, Investopedia). With this plan, investments are made after paying taxes but all the growth due to investing will be tax-free. Many employers allow employees to have both kinds of plans. Because of this benefit, many young employers such as Cyan Baker, choose to also get Roth plans under her employer. I have a traditional 401k but am looking at getting a Roth 401k soon in addition (Baker).
The sooner you enroll in a 401k plan, the more money you will have for your retirement.