A 401(k) plan can be a useful part of your retirement savings strategy, depending on your personal financial situation and retirement goals. And because they must be offered through your employer, 401(k)s can be an easy, automatic way to invest during your working years.
How is a 401(k) different from other investments?
401(k)s can be approached like any other long-term investment. You should achieve the right balance of good long-term growth prospects and risk-appropriate strategy. 401(k) accounts are unique in two ways:
- Your emotional attachment—you've worked your whole life for this money.
- Restrictive investment options most investors have to choose from up until they roll it over.
– You can designate how much you want to save per pay period (up to $18,000 annually in 2015 and 2016*).
– Contributions are deducted from your paycheck, pre-tax.
– Money you save grows tax-free—you don’t pay income taxes until you withdraw the funds.
– Some employers contribute to their employees’ 401(k)s, usually a percentage of what you put in each year—free money!
There’s a special type of 401(k) known as a Roth 401(k), and it differs from a traditional 401(k) in one important way: You pay taxes on your contributions, but then you don’t pay taxes on future distributions.
401(k) Withdrawals and rollovers
Early 401(k) withdrawals can be very costly; read why, and learn the benefits of rolling your old 401(k) into an IRA.
* IRS.gov, as of 12/01/2015