There is much buzz about the importance of contributing to a 401(k). As pension plans have become less and less popular, the 401(k) has climbed the social ladder to popular status. Even though there is a lot of talk about how everyone should be utilizing this retirement savings vehicle, many people are still unsure of what the product actually entails. [[example of something women do but only before researching]]. Here are all of your questions about the 401(k) answered:
- What is it exactly?
A 401(k) is a savings vehicle that is offered by your employer. It is provided to help you save for retirement and usually consists of investments in mutual funds.
- When do I contribute money?
Some companies allow employees to open their 401(k) as soon as they are hired or begin working. Others have set enrollment periods in which you can opt to participate in the plan. Once you are enrolled, you can contribute your pre-tax dollars to the plan monthly on an automated schedule.
- How much do I contribute?
The maximum you could contribute to your account in 2015 was $18,000 for those under age 50. If you are over the age of 50, you are allowed to contribute up to $24,000.
- What is the ‘employer match’?
One of the reasons for all of the buzz surrounding this savings vehicle is due to the employer match. Your employer will match a percentage of your contributions. This is why people call this “free money”. Say you contributed $100 to your plan, if your employer match was half of your contributions, and up to 6%, they would add $3.00 to your account. It may not seem like much but when you start contributing more, it adds up! And its free!
- What does it mean to be vested in the plan?
Your employer has a vesting schedule that describes how many years it takes to become partially or completely vested in the plan. Only when you become vested in they plan, do you get to keep those employer match contributions. You always get to keep your contributions.
- Can I pull out my money to use it?
If you withdraw money before you reach age 59 ½, you will have to pay a penalty. If you change jobs before age 59 ½, you can rollover your current plan into your new plan with your new employer.
- Do I pay taxes on the money I withdraw?
While you do pay taxes on the money when you withdraw it after age 59 ½, you do not pay taxes before you contribute it initially. This means that the money grows tax-deferred. You will only pay taxes once, when you withdraw, and ideally you will be in a lower tax bracket when you retire.
- What is a RMD?
RMD stands for Required Minimum Distribution. When you reach age 70 ½, the IRS requires that you withdraw at least a minimum portion of your money each year. The amount you are required to pay is calculated using your age, your life expectancy, the amount of money in your account, and other factors.
- What’s so good about a 401(k)?
The combination of the ability to grow your money tax-deferred and the employer match is what makes this savings vehicle so attractive. With pensions disappearing, the 401(k) is an appealing method to saving for your retirement.
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