You may qualify for a 401(k) plan through your job. This is the most common type of retirement plan that employers offer. A 401(k) allows you to make contributions to an account that is set up for your retirement, with special tax benefits.
A 401(k) calculator can help you determine how much you need to contribute each month to reach your retirement savings goals. Our retirement calculator is easy to use.
You need to understand that the market will fluctuate, and the best way to manage your retirement savings is to allow it to grow without panicking about market conditions. For instance, when you are in your twenties and thirties, you will want to pick more aggressive retirement funds. In your forties and fifties, you will want to move your retirement savings into more conservative investments. Your 401(k) plan should allow you to choose how much your funds will go to each type of investment.
The 401(k) contribution limits are set at $17,500 for 2013. There is a catch-up contribution that allows anyone over the age of 50 to contribute an extra $5,500. This is the limit that the employee is allowed to contribute, and it does not include any matching funds that your employer will contribute on your behalf. Many experts encourage individuals to contribute about fifteen percent of their income to their retirement accounts each year. If you want to reach the 401(k) contribution limit, you will need to contribute $1,458 towards retirement each month.
There are some basic differences between a traditional and a Roth 401(k) account. A traditional account allows you to make contributions before you are taxed. However, you will be taxed on the money you pull out of the account when you reach retirement age. In a Roth 401(k), you will pay taxes on your contributions, but the money is allowed to grow tax-free and you will not be taxed on withdrawals.
There are 401(k) withdrawal penalties if you do choose to withdraw the money early. You will pay taxes on the money and an additional ten percent penalty on the money you withdraw. However, there are some allowable 401(k) withdrawals. You can withdraw money to pay medical expenses that are more than 7.5% of your income. You can also take a loan from your 401(k), but you must pay it back with interest. If you switch jobs, you will have to pay off the loan or face the penalty and taxes. It is best to leave the money in your 401(k) alone until you reach retirement age. This way you will have it when you need it.
When you leave your current employer, you will have the opportunity to complete a 401(k) rollover. You may choose to do this because you want more control over your retirement plans, or the 401(k) plan may require you to do it. You will need to set up an IRA, and roll the money from your 401(k) into the new plan. You have sixty days from the time of the withdrawal to do this. You can complete a 401(k) rollover at a bank into a CD or at an investment firm into mutual funds.