If you are working, do you plan on retiring some day? If you were planning on retiring on Social Security alone then I have bad news for you. The paltry benefit amount that Social Security pays (if there is any money left in the trust fund when you retire) will only be enough to give you a steady diet of canned food at retirement. Unlike your grandparents, the new reality of retirement planning means taking control of your future by investing your money into an individual retirement account. You can no longer on Social Security alone to provide a comfortable life during retirement.
What is 401k retirement investing?
A 401k is a pension plan set up by an employer to allow employees to save for their retirement. Once enrolled in a 401k pension plan, an employee has the option to invest their contributions (a fancy name for savings) into a selection of mutual funds, stocks, bonds, or money market in their employer plan.
What is the benefit of 401k retirement investing?
The contributions in a 401k account are tax deferred until you withdraw the money at retirement. One of the benefits of 401k retirement investing is that you will lower your taxable income during your working years.
Most companies will also match a portion of your contributions to your 401k retirement account. Think of this employer matching contribution benefit as free money for your retirement account. And usually within 3 or 5 years of contributing to your 401k account, you are considered vested in your companies 401k. Vested means that you own your employer’s contributions to your retirement account free and clear. If you are not vested, you will lose your employer’s contributions if you leave your company.
What happens to my 401k if I leave my company?
Even before you are vested in your companies 401k retirement plan, you always have the option to take your contributions with you if you leave your company. Never ask your 401k plan to cut you a check. The IRS will see this as a distribution, so not only will you be taxed on the amount, but you will also be hit with penalties for early withdrawal which will be extremely costly. Instead, you want to rollover your 401k retirement account to your new employer’s 401k retirement account. If your new employer does not have a 401k retirement plan, you can go to your bank and open up a Rollover IRA.