So you just got your first big job and are facing the paperwork required for your first retirement savings plan. Understanding 401K plans can seem overwhelming at first, especially if you do not know much about finances. Lucky for you, these plans are actually very simple to set up and can guarantee you the money you will need to retire in the future.
Since a 401K is offered through your employer, all you should have to do it is sign the paperwork and decide how much of your annual income you want to contribute. If your employer is offering to match some of your contributions, then it may be a good starting point to put in the top percentage that will be matched to reap as much of the benefit as possible in the long run.
You may also have the option of choosing whether your money is invested in stocks, bonds, or mutual funds. You may seek advice to make these decisions, but a mix of all three or playing it safe with bonds is always an easy decision.
You do not have to physically do anything to put your money into the account. Once you fill out the paperwork and specify the percentage of your income to go into the account, it will simply be taken out before you even receive your paycheck. The money is taken out before taxes, so the amount of income you have to file taxes for at the end of the year will depend on how much you contribute to your account. Keep in mind that you will have to pay when you withdraw the money, and it will be at your tax bracket at that time, not your tax bracket today.
Taking money out of your 401K will not be an option until you reach the age of 59 ½. After that point, you will be required to pay taxes on any money taken out, but you will not be stuck with penalties for taking the money. Once you hit 70 ½ you will be required to take yearly withdrawals, whether you want to or not. Not taking the withdrawals once you hit 70 ½ holds stiff penalties that can hand much of your saved money over to the IRS, so be sure to have the money taken out as scheduled when you get to that point.
Any early withdraws before the age of 59 ½ will carry stiff financial penalties that can be as high as 50% of the amount withdrawn. The only exceptions to this, are funds used to finance your first primary home or to pay for higher education for yourself, a spouse, children, or grandchildren.
Understanding 401K plans should not keep you up at night. For the most part, any questions can be answered by your employer, and some employers even have financial advisors that come into the office to discuss investment options with interested workers. Take advantage of all the assistance and advice you can get from them and you will find your investments really paying off by the time you are ready to retire.