Investing
401(k)
A No-Brainer Investment Option
A 401(k) is a retirement savings plan sponsored
by an employer. It allows employees to save and invest a portion of
their paycheck before taxes are taken out. Taxes aren't paid until
the money is withdrawn from the account, usually during retirement.
One of the key benefits of a 401(k) plan is the
potential for employer matching contributions. This means that an
employer may match a portion of the employee's contributions,
effectively providing free money to boost their retirement savings.
Additionally, the contributions to a 401(k) are made on a pre-tax
basis, reducing the employee's taxable income for the year they are
made.
There are limits to how much an individual can
contribute to their 401(k) each year, defined by the IRS. It's
important to be aware of these limits and plan contributions
accordingly. Withdrawals made before the age of 59½ may be subject
to penalties, although there are specific circumstances under which
these early withdrawals can be penalty-free.
401(k) plans offer a range of investment
options, and it is up to the employee to choose how to allocate
their contributions. Regularly reviewing and adjusting investment
choices can help align the employee's retirement savings strategy
with their financial goals and market conditions.
401(k) Strategies
Contribute the Maximum allowed
It is usually best to contribute the maximum
amount allowed, at least up to what an employer matches. For example,
if an employer matches 3% up to 10% of your income, contribute at
least 10% because with the match, that is a 13% contribution towards
your retirement.
Roll Over a 401(k) at 59 ½
At 59 ½ you can roll over your 401(k) to any
qualifying product without penalties, even if you are still working
and contributing to it.
This is a great opportunity to earn more for
your retirement. The average 401K APY is 5-8%, Annuity based
products can yield 8-14% APY.
403(b)
403(b) plans and 401(k) plans are very similar
but with one key difference: whom they're offered to. While 401(k)
plans are primarily offered to employees in for-profit companies,
403(b) plans are offered to not-for-profit organizations and
government employees, including public school employees.
Summary
Employer-sponsored plans like 401(k)s
(for private sector employees) and 403(b)s (for employees of public
schools and certain non-profit organizations) allow for tax-deferred
contributions from both employees and employers. These plans often
include employer matching contributions, which can significantly
boost retirement savings. Withdrawals in retirement are taxed as
ordinary income.
Page Last Updated: 20 March 2025