Do I Need To Pay For 1.5 Years Old Baby Simple Rules to Follow for a 401k

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Simple Rules to Follow for a 401k

Today, most employers offer a 401k to their employees. It’s one of the easiest and most convenient ways to save for retirement. Most of the time, you simply fill in the amount or percentage you want to save in the 401k. Once you have determined the amount you wish to invest, you then choose the mutual funds in which you wish to invest your money.

Yes, that’s a simplistic answer, but saving for retirement doesn’t have to be difficult.

The advantage of a 401k is that most offer an employer match. An employer match is the amount the employer will contribute to your 401k account as long as you make a certain percentage. An average 401k typically has a 3% match. So if you contribute 3% of your annual salary to the 401k, your employer will match that same 3%. It’s like getting a 3% raise from your employer. If you do nothing, you get nothing. Now, if you make at least 3%, your employer will match that same 3%.

There are other matching percentages, i.e. if you do 3% they will be 50% or 1.5% of that amount. The two phrases for a match are dollar for dollar or a percentage match like 25% or 50% of what the employee contributes.

The employer match is one of the great benefits of a 401k. Another benefit is tax-deferred income on your investments. In a 401k, you pay no tax on the growth of your investments as long as the money stays in the 401k. Once you leave this employer, you have several options. The first is to move the money from the 401k into your own IRA or another 401k such as your new employer’s. The second option you have is to take the distribution or receive a check that you deposit into your bank account. Once you do that, you have 60 days to deposit that money into another IRA. If you don’t deposit the money into another IRA, the IRS will charge you a 10% penalty and this amount will be fully taxable.

For example, say you have $10,000 in your 401k and you decide to ask them to send you a check so you can pay some bills. When you file your taxes, the IRS treats that money as if you earned an extra $10,000 that year. So depending on your tax bracket, it could cost you 30% to 40% or $3,000 to $4,000 in additional taxes. You think that’s not much because you’ve at least eliminated that credit card bill. However, if you were only 35 at the time and did not plan to retire until age 65, the value of $10,000 could have risen to $147,300. So that little mistake cost you over $147,000 on a small investment of $10,000.

For many people, this is basic knowledge, but many don’t realize that the same mistakes they make can escalate into big mistakes later on.

I hope you enjoy this information. Until later, keep saving for your retirement.

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