Taking a closer look at your 401(k) plan

Posted at 7:44 AM, Mar 24, 2017
and last updated 2017-03-24 07:44:59-04

Many companies offer 401(k) plans, but not all employees take advantage.  Editors at Yahoo Finance did some digging to find out 1/3 of eligible millennials aren’t signing up.   In their latest two-minute-money report they lay out reasons for contributing to a 401(k) and how they work.  Check out the full article at:

Also here's a quick checklist of what you need to know:

How do 401(k)’s work

  • A fraction of each paycheck gets invested in your retirement fund—before taxes are deducted.
  • In addition to tax savings, your company might match a portion of your annual contribution. Say you invest 3% of your income—some employers will match you dollar-for dollar. Say you make $55,000 a year. At 3%, what comes out of your yearly paycheck is $1,650, but what goes into your 401k is $3,300. A generous company will match a higher percentage. An extremely generous, lovable company will match your contributions up to 6% of gross income.

What should you invest in?

  • 401(K)s give you options. A good reason to enroll now is you can confidently invest more of your savings in index fund based mutual funds and target date funds —with potentially greater payouts.
  • But you can devote most of your savings to more stable bonds as you get closer to retirement.

Is there a catch?

  • Yes, severe tax penalties if you cash out before 65. So don’t cash out early. Patience pays off play the long game.
  • There’s an upside if you do: a break on your tax returns. A quarter of your annual contributions—roughly—can be written off each year tax-free interest for decades. While your 401(k) matures, earnings compound tax-free.

Why is a 401(k) better than your typical savings account?

  • Even though you[‘re taxed after withdrawal, they’re still the better option.
  • Say you have an average salary of $100,000 over a 40-year career. If you set aside 10% each year, and your employer matched 5% the contributions would grow tax free, every year. An average 5% rate of return means that your earnings from each year would be added to the balance that earns 5% next year. In 40 years, you’d grow an extra $900,000! And retire with a balance of $1.5 million!
  • If you had put 10% into a savings account instead, you’d have invested $300,000 and paid taxes along the way.

Even if your employment situation changes/you switch jobs, don't cash out!

  • You can leave your money in your previous employer's plan
  • Roll over your 401(k) to your new employers's plan
  • Move it into an IRA (Individual Retirement Account.

Check up on your 401(k) but not obsessively. Market is constantly fluctuating. This is the looooong game.

  • You always have the option to rebalance (changing what % you want in equities vs. bonds) but get professional advice, don't act rashly just because of one down day/week/month