A 401(k) plan is one of the basic building blocks for a comfortable retirement. Knowing how to use this option correctly can put you in a better financial position and maximize your benefits. Here are a few things to consider about taking advantage of this program.
The Bottom Line
With a traditional 401(k), you can designate a specific savings amount for each pay period. This amount is taken from your paycheck pre-tax, and the funds also grow without income taxes applied until you withdraw from the account. Employers will often contribute or match an amount to the 401(k), typically based on a percentage of what you apply each year. Do not miss out on this aspect of the deal; you are receiving free money! Taking advantage of this is one way to maximize your savings. Employees also have the option of opening a Roth 401(k), which requires that you pay taxes on any contributions, but are free from taxation when you receive distributions in the future.
Make it Count
There are several things you can do to boost the benefits of your 401(k). Try to meet your employer’s match as soon as possible so that you do not miss out on the free capital, and if you are above 50 years of age, utilize the “catch-up” provision. This increases the maximum contribution amount annually, allowing you to apply an additional $5,500. Plan to increase your contribution by at least 1% every year. This will help you to maintain your budget while slowly working up to the highest amount you can save. Never leave a job without first ensuring that you carry over any funds that you have applied to your 401(k) during employment. Also, be aware of your company’s vesting schedule before you solidify your plans. Many companies do not consider any matched money to be yours until you have worked with them for a specified amount of time. Finally, avoid borrowing from this account as much as possible to avoid penalties.
Financial stability is an essential component to your quality of life. Your future is just around the corner, and using your 401(k) properly will help you successfully prepare for a comfortable retirement.
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