A 401(k) relieves you from the burdens of work. Retirement planning is important because during retirement years you will have comfort and needs. Your retirement savings will be a source of income that removes or reduces your need to maintain employment. While having income for healthcare and other insurances.
What’s a 401k
A 401(k) is a retirement savings plan that allows employees to contribute a portion of their wages to individual accounts. There are two distinct types of 401(k) retirement savings plan; Traditional 401(k) and a Roth 401(k). Key differences between these two plans have to do with taxes. Depending on your personal preferences and the economy you may find one savings plan more favorable than the other. However, only a minority of Americans can say they have adequate savings prepared for their golden years. Meanwhile, more than two-thirds of Americans have a 401(k) savings plan available to them by request at their place of work.
Why 401(k) is important
A 401(k) retirement savings plan is important. You want to start your plan early so that you can be better prepared for critical moments you may have to deal with later on. You may already be involved in stocks. With new technologies and trading apps this is becoming more of an option.
Why would I start my retirement planning when I made $2,000 on a trade in 4 days?
The stock market will change and expecting steady returns based on your streak of success is worse than saying you can time the market. A 401(k) retirement savings plan is a fund for you during retirement years. For this reason, there are options which allow you to adjust your retirement savings within your means. For example, with a Roth 401(k) you have the option to pay taxes now, or pay taxes later in a Traditional 401(k) plan. Whereas, you are by law obligated to pay a tax anytime you make money on a stock trade.
Additionally, you would prefer a 401(k) savings plan for your employer’s match. Sure, by meeting with your supervisor and opening a 401(k) your contributions are all made from your paycheck. So, every dollar you designated to your fund is a dollar you can’t spend yet. What about if for every dollar you put into your fund I matched you? The best feature of a 401(k) retirement savings plan maybe the 401(k) employer match. Employers will typically match a contribution of an employee’s annual salary up to a certain percent. This is money paid to you by your employer in which you would otherwise not receive.
401(k) Benefits
Many companies have employee benefit plans. Employee benefits include health insurance, dental coverage, and a retirement savings plan all available to you. While large companies offer the perks of discounted merchandise, employee packages can also benefit you in the long-term.
How 401(k) is taxed
The two types of 401(k) plans are Traditional and Roth.
Traditional 401(k) plans
Having a Traditional 401(k) means that any taxes will only be deducted at time of withdrawal. Essentially, the federal government is asking “Taxes now, or taxes later?”, a Traditional 401(k) is taxes later. This plan makes smart money sense if tax rates are high, perhaps there is a supply-shortage and the government decided to raise taxes. You can avoid paying an excessive amount in taxes with a Traditional 401(k) plan.
roth 401(k) plans
A Roth 401(k) means that any time you make a contribution to your retirement fund you can expect to pay a tax. Roth 401(k) plans are the ‘taxes now’ option. A Roth account is essentially a plan to make more money in the future. Roth 401(k) retirement savings plan makes smart money sense if you anticipate earning a high salary. If your current position highly favorable to you and intend to grow in your work environment, you may lower your tax burden during retirement by having paid your contributions pre-taxed in your Roth 401(k) plan.
“Tax, Please”
A 401(k) always belongs to you and contributions made by you or your employer are all yours. Things may change where you decide to a Roth plan is better than a Traditional plan, there are options to transfer your account from one to the other in the event you change your mind.
401(k) Long-term and strategic financial management
Essentially, you will always want to give yourself more options. Your may only intend for your position at your current place of work to be short-term, but professionally you want your short-term position to provide towards your long-term goal. Starting a 401(k) is as simple as meeting with your supervisor.
Resources of the now are limited compared to resources of the future.
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